how do high interest rates reduce inflation?

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Please explain how higher interest rates helps reduce inflation? No matter what, people still have to buy shit. So how does high interest rates get people to spend less? People still need to buy homes, cars, food regardless of what the interest rate is. Those are kind of necessities, so shouldn’t the government do more to make it more affordable?
And if businesses are paying more for a product, then they have to charge the customer more. They can’t charge less just because people aren’t buying. If they do they won’t make any money themselves.

I’m confused. Please explain it to me.

In: Economics

11 Answers

Anonymous 0 Comments

Much more complete answers here already, but the simplest answer is that the interest rate that the Fed sets isn’t about you buying food, or even a car. It’s about the large-scale investments that entire businesses fund by borrowing money. These are loans and investments that happen at a scale far above the individual consumer.

Home loans are (pretty much) the only individual-scale thing that the interest rate affects, unless I’m grossly underestimating how much money the American public has invested in total car loans.

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