You need to know how to calculate the interest you'll get by leaving your money on deposit for a certain amount of time, but it's also good to know how financial institutions arrive at the interest rates they advertise.

Interest rates are affected by a number of factors. The Federal Reserve, which is charged with maintaining the stability of the nation's financial system, raises or lowers short-term interest rates in an effort to maintain that stability. The Fed regularly takes these actions in response to economic ups and downs that the country goes through on a fairly routine basis.

Regular interest rate adjustments
Short-term rates are raised in what are called expansions -- good times -- to keep the economy from building too fast and risking inflation. Inflation is when too much money chases too few goods and services, sending prices upward. Raising interest rates slows down the economy because it makes it more expensive for you and for businesses to borrow money, which means you'll have less to spend.

The Fed will lower short-term rates when the economy is contracting -- slowing down. Lowering rates makes it less expensive to borrow money. Now you and businesses can afford to buy more products and services. That speeds up the economy and keeps it from sinking into a recession. A recession happens when consumers hold on to their money or don't have much and don't buy the products and services that keep companies afloat and employees employed.

When the Fed cuts short-term rates it is cutting the rate that banks charge each other to borrow money. Those cuts are eventually passed on to businesses and consumers. The same thing happens in reverse when the Fed raises short-term rates.

Other factors and their impacts
Other factors affect interest rates, too, but on a more irregular basis. A crisis involving the foreign oil-producing nations, for example, could have a major economic impact that could affect interest rates.

Long-term interest rates aren't affected as quickly by economic conditions as are short-term rates, but there is a trickle-down factor and they reflect the impact eventually.

What works for you as a saver works against you as a borrower. When rates are high, you're earning a hefty amount of interest for your deposits, but you're going to pay a high interest rate if you need to borrow.

When rates fall, you don't get much interest on your savings, but it's a lot cheaper to borrow money.