Change in interest rates have wide effects, i.e., change in lending rates, borrowing rates, inflation, assets prices, share prices and above all, change in exchange rates. Though the relationship is not easy in many case, there is need to meticulously interpret any change in rates by the central bank. This article explains the effects of change in interest rates.

As Prof. Bond (short for Bandhopadhyay) entered the class, he found a heavy silence. "What's the matter? Monday morning blues?" the Prof. asked in a jovial tone. Confucious (because he was always confused), a student, as usual, seemed perplexed and showed an article on monetary policy to the Professor.

"I can't figure out why all this fuss about interest rates and monetary policy", said B. Prof. Bond looking at the article in his usual manner, a frown on his face taking the shape of a grin as he reached the end of the article. He rolled up his sleeves and said, "Ok let's start with the basics. What are interest rates? Interest rate is simply the cost of money. Just like we need to pay a price for buying our movie tickets or burger at McDonalds, we need to pay a price for borrowing money. This is what we call cost of funds from the point of view of borrower and for the person lending, it is the price received, which we call yield on capital."

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