The Relationship Between Interest Rates and Inflation

Brief Overview

The relationship between interest rates and inflation is inversely related, meaning that when one goes up the other goes down, and vice versa.

Inflation in the increase in prices of a specific set of goods and/or services within a specific time.

Prices of goods and services generally increase when citizens spend more.

Supply and demand in macroeconomics, explain that when the demand of goods and services go up, the prices usually go up as well, And when the supply is too much in relation to demand, the prices tend to go down.

Citizens spend more when interest rates are low because availability of funds from banks as loans is easily accessible and cheap.

They borrow more and as a result have more money to spend.

When interest rates are high, it means the cost of borrowing money is expensive and citizens withdraw from getting unnecessary loans from banks and financial institutions.

Unavailability of money supply in the economy as a result of high interest rates causes the prices of general items to reduce because spending from the citizens is low, therefore, inflation is lowered.

Inflation levels of prices of goods and services could also be affected as a result of a weak currency or extended bad economic times.

The relationship between interest rates and inflation is inversely related, meaning that when one goes up the other goes down, and vice versa.

Monetary policies within a country ensure that optimum levels of interest rates and inflation are maintained at a healthy level for the growth of the country.

Summary

When interest rates are high, citizens spend less because they borrow less, causing inflation to lower; When interests are low, citizens borrow more and thus spend more, causing inflation to rise.

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