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
High interest rates means two things:
* It costs more to borrow in terms of interest accrued.
* You get more interest on your savings.
Both together work to disincentivize spending, meaning it doesn’t make as much sense for businesses to increase prices as much, so inflation rate is reduced (remember, reduction in inflation just means reduction in inflation rate generally, meaning price increases from inflation grows slower).
At least, that’s the logic of it. Reality didn’t work out that way as cleanly.
Latest Answers