Eli5- Inflation and High interest rate

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If the government or the bank increasing the interest rate to tackle inflation so that people would have less money to spend and the hoping the prices coming down. Wouldn’t it be easy to let people have the money so that they can spend during inflation rather than giving away in name of interest rate?

In: Economics

4 Answers

Anonymous 0 Comments

High interest rat also have a major impact on the giant corporations. Most of them run their day-to-day business on huge loans. That money now is a lot more expensive to borrow, so companies borrow/spend/expand less overall. This takes money out of the economy and can lead to lowering inflation.

Anonymous 0 Comments

Raising interest rates controls inflation because it makes people less likely to borrow money to buy things. It also makes them more likely to save their money. Giving more money to people to spend during high inflation just makes it worse, because demand stays high so prices keep rising

Anonymous 0 Comments

Plus if you just keep printing money to hand out so people can buy stuff….

Demand stays high, supply can’t meet demand, so prices just keep rising even faster.

And that doesn’t even account for the devalued currency which then wrecks and savings or investments. Since things get more expensive and my saved money means less I should hurry up and spend it…. Which drives up demand even more

Anonymous 0 Comments

>Wouldn’t it be easy to let people have the money so that they can spend during inflation rather than giving away in name of interest rate?

No. That runs counter to the whole idea. With raising the interest rate, you WANT consumers to pare back on borrowing/spending, so that the economy slows down and inflation comes down with it.

If you give consumers money, they will spend it, which only exacerbates the issue.