Compounding Interest
Compounding interest occurs when the interest you owe is added to your balance each month, causing you to pay interest on both the original amount and the accumulated interest. This monthly compounding makes your debt grow faster over time. Even small interest rates can add up significantly if the balance is not paid down. The longer the debt remains unpaid, the more the total amount owed increases.
Mortgage
A mortgage is a loan used to buy a home or property. The borrower agrees to make monthly payments of principal and interest over a set period, usually 15 to 30 years. The property itself serves as collateral for the loan. If the borrower fails to pay, the lender can take ownership through foreclosure.
ARM (Adjustable-Rate Mortgage)
An adjustable-rate mortgage (ARM) has an interest rate that changes over time based on market conditions. It often starts with a lower “introductory rate” for the first few years before adjusting at set intervals. Monthly payments can increase or decrease depending on how interest rates move. ARMs carry more risk but can be cheaper initially.
Fixed-Rate Mortgage
A fixed-rate mortgage keeps the same interest rate for the entire life of the loan. That means monthly payments stay consistent, making budgeting easier for homeowners. Fixed-rate loans are popular because they provide long-term stability. They are especially beneficial when interest rates are low.
Households, Firms, and Government
In economics, households, firms, and the government are the three main sectors that interact in an economy. Households provide labor and consume goods and services. Firms produce goods and services while employing labor. The government collects taxes, provides public services, and regulates economic activity to maintain stability.
Gross Domestic Product (GDP)
Gross Domestic Product (GDP) measures the total value of all goods and services produced within a country’s borders during a specific period. It’s a key indicator of economic performance. When GDP grows, it signals a healthy, expanding economy. Declines in GDP often point to economic slowdowns or recessions.
Buying on the Margin
Buying on the margin means purchasing stocks or other investments using borrowed money. Investors only pay a small percentage of the cost upfront and borrow the rest from a broker. This increases potential profits—but also magnifies losses. Excessive margin buying in the 1920s helped trigger the stock market crash of 1929.
Great Depression
The Great Depression was the worst economic downturn in U.S. history, lasting from 1929 to the late 1930s. It began after the stock market crash and was made worse by bank failures, high unemployment, and falling prices. Millions lost jobs, homes, and savings. The crisis led to major government reforms and safety nets like Social Security.
Great Recession
The Great Recession occurred from late 2007 to 2009 and was the most severe economic downturn since the Great Depression. It was caused by a housing market collapse, risky mortgage lending, and financial institution failures. Unemployment rose sharply, and millions lost their homes. The government intervened with bailouts and stimulus programs to restore stability.
Inflation is the general rise in prices of goods and services over time. When inflation occurs, the purchasing power of money decreases, meaning each dollar buys less. Moderate inflation is normal and often signals a growing economy. However, high inflation can hurt consumers and savings, while too little inflation can slow economic growth.
