The cost of borrowing or the reward for saving is known as what?

• A. Subsidy
• B. Tariffs
• C. Interest
• D. Quota

Answer: (C)

Interest is the price of using someone else’s money. It’s what you pay to borrow funds and what you earn for saving or lending your money. Lenders charge interest to compensate for the time value of money, risk, and inflation, while savers earn interest for postponing consumption and supplying funds to borrowers. Real interest adjusts for inflation, while nominal interest is the stated rate. The other terms refer to different concepts: subsidies are payments to support activities, tariffs are taxes on imports, and quotas are limits on import quantities. So the correct idea—the cost of borrowing or reward for saving—is interest.