How are interest rates best defined?

Interest rates are best defined as the cost of borrowing money or the return on savings because they represent the compensation that lenders receive for providing funds to borrowers, as well as the compensation that savers receive for allowing their funds to be used by others. When a borrower takes out a loan, the interest rate is the rate at which they are charged for that loan; it reflects the opportunity cost of lending and the risk of default. Conversely, for individuals who deposit money into savings accounts or purchase bonds, the interest rate indicates the returns they will earn on their deposits. This concept is fundamental in macroeconomics because it influences consumer and business behavior, impacting overall economic activity, investment decisions, and consumption patterns.

Understanding interest rates in this way highlights their critical function in financial markets and the economy, as they balance the supply and demand for funds, guide monetary policy, and affect inflation rates. Other options, while they may relate to finance, do not capture the comprehensive definition of interest rates that encompasses both borrowing and saving perspectives.