Definition of Cheap Money
What is the definition of "cheap money"? What does the term "cheap money" mean?
"Cheap money" is money that has been borrowed at a very low interest rate. "Cheap" is used because the money that has been borrowed is considered to be very "cheap" due to the low rate of interest that is being paid.
When an economy is struggling, central bankers will usually lower interest rates in order to create some positive economic momentum. The cheaper that money is, the more loans that people will take out to start new businesses, purchase vehicles, purchase homes, etc.
Reversely, when an economy is running too hot, central bankers will usually increase interest rates in order to avoid higher levels of inflation. Cheaper money = more money circulating in the system, which = more money chasing goods and services, which = higher prices, while = higher inflation.
An example of cheap money? A car financing plan that offers a 1% interest rate over the life of a loan. This would be "cheap money".
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