Question

What is inflation and explain how inflation impacts a savers decision regarding the interest rate they will demand of borrowers?

Answer 1

Inflation is a sustained increase in general price level of goods and services in a economy over a period of time .

When the general price level rises each unit of currency buys fewer goods and services .as we know inflation reflect the reduction in purchasing power per unit.

If central bank will increase interest rate to moderate the inflation rate then the saver who have fixed income may become relatively worse off .borrower by contrast are likely to find it easier to pay back their debts.

For saver with cash under the bed or receiving fixed interest payments then higher inflation rate could reduce the real value of their savings