why does the Reserve bank, in order to get inflation under control, raise interest rates, which raises cost of living? it seems like it would make the situation worse (at least in the short term)

Question

why does the Reserve bank, in order to get inflation under control, raise interest rates, which raises cost of living? it seems like it would make the situation worse (at least in the short term)

In: 9

Answer 1

When interests rates rise more money ends up in banks. This results in people spending less money. With people spending less money the demand for goods goes down. With the demand for goods going down inflation should also decrease as companies will respond to lower demand by decreasing prices.