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you and the seller, the seller would normally demand that you pay the price in full before you take ownership of the house. This is the same as when you buy a can of soda from your nearby convenient store. The difference is that you may not have a lump sum of $120,000 (average price of a house in the US) to pay the seller. Even if you have the money, you may not want to pay the entire sum at once, as you may have other plans for the money. So what do you do? You pay the first $20,000 out of your pocket and then you go to your favorite bank asking for a $100,000 mortgage. If you can meet their requirements, you secure a 30-year $100,000 mortgage at 8% (average going rate these days) interest rate. In other words you buy $100,000 from your bank to be paid back at 8% interest in 30 years. Congratulations, the house is now yours - well, in 30 years.

So what does the tightening and loosening of the Monetary Policy have to do with interest rates? In simple terms, supply and demand. When the Fed wants the interest rates to ease, it allows the infusion of more cash into the economy thereby loosening the Monetary Policy. As the money supply grows, the cost of borrowing it drops (remember the rules of supply and demand); in other words, lower interest rates. Conversely the Fed can push for the reduction of money supplies, thereby tightening the Monetary Policy. As the money supplies shrink, the interest rates climb.

Key Interest Rates

So when we talk about interest rates, exactly which interest rates are we referring to? The answer is that generally all interest rates tend to follow the same direction, long term as well as short term, including rates that affect our everyday lives such as savings, CDs (Certificates of Deposit), business loans, mortgage rates, and so on. There are, however, a few interest rates that are considered key rates because of their …