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ch 5 What is The impact of inflation on interest rates.

ch 5 What is The impact of inflation on interest rates.

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Answer #1

There is an inverse relationship between interests rates and inflation. When interest rates rise, people needs to pay more in the form of interest to bank for the funds they have borrowed. This reduces their disposable income which leads to a greater savings. Since consumption decreases, inflation decreases as people spend less due to rise in interest rates.

When interests rates decrease, people pay less interest to bank for the money they have borrowed. Therefore, people are left with a greater share of disposable income. This leads to rise inflation as people spend more due to decrease in interests rates.

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