Eli5: How do changes in the money supply affect inflation and interest rates in an economy?”
In: 0
Imagine a desert island. If I had a banana and u had a orange, I want an orange and u want a banana, we can trade and we both get what we want.
If u suddenly got 2 oranges and I still have 1 banana then the banana is now worth 2 oranges, Because the amount of orange u got is double but the amount of bananas is still 1.
Inflation means there are more dollars chasing the same amount of goods. It is like the orange doubled but the banana is still 1.
Now what interest rates do it alot more complex.
Now imagine a 3rd guy. He has 5 apples.
I no longer want oranges but I want 5 apples for my 1 banana. The 3rd guy doesn’t want bananas but kind of wants oranges but can go without. U ask to borrow the apples but he doesn’t really want oranges, he agrees if u promise to pay back the 5 apples u borrowed with 6 apples later. U trade and then u start again. But o no. He really doesn’t want more oranges so u now have to pay back 7 apples for the 5 u borrowed. U can’t afford to pay back 7 apples so u don’t borrow it.
Interest rates is like that. It makes it more expensive for people to borrow the same amount of money for business and houses. This had alot of other effects as well but beyond a simple explanation
Latest Answers