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
Inflation, generally, is caused by increased demand for goods and services. Generally, as people have more money they will spend that money on goods and services, so that pushes up the demand
Low interest rates serve to increase the availability of money, because it’s cheap to borrow. People borrow money to buy bigger/nicer houses. People borrow money to buy cars. Crucially, governments borrow money to spend on services. This all filters into the economy through wages to workers and income to business owners, and THEY spend more because they are making more, and that causes prices to go up as demand has gone up
On the flip side, raising interest rates makes borrowing money more expensive. It kind of soaks up the excess money, so people have less to spend on goods and services because it’s now going into interest payments, and they can borrow less because they can’t afford the payments. People buy fewer cars, they buy fewer and cheaper houses, they borrow less for renovation projects. Crucially, more government money goes towards interest instead of to services or payments to citizens so that money doesn’t filter into the economy
Basically, inflation is caused by money pumping into the economy. Higher interest rates are like a sponge that soaks up that excess money
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