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General Interest > Science and Technology
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inflation and interest rates
    #4819825 -

I'm not sure if this is the right forum for this, anyway mods feel free to move if it isn't.

My question is to any economists out there. Can you give me a layman's easy-to-understand explanation on why raising interest rates reduces inflation? I always hear a big fuss on the news about this but I really don't understand it.

Thanks.

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Re: inflation and interest rates [Re: lIllIIIllIlIIlIlIIllIllIIl]
    #4820624 -

Higher interest rates causes slower growth of the money supply. Thus, increasing the value of the economy's money.

So essentially, higher interest rates are suposed to discourage people from buying so much which, in turn, will cause deflation.

Hope that is simple enough. :-)

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Re: inflation and interest rates [Re: VoidOfsPg]
    #4821687 -

So in other words this is because most people owe money (credit cards, mortgage, loans) and increasing interest rates makes them scared (and have less money) so they are more cautious and buy less...

...And when people buy less it is a buyer's barket so prices go down, ie deflation...

That more or less the process?

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Re: inflation and interest rates [Re: lIllIIIllIlIIlIlIIllIllIIl]
    #4823333 -

You've got the general idea. :-)

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Re: inflation and interest rates [Re: VoidOfsPg]
    #4849865 -

this might appear a bit complicated at first, but if you take your time and look up terms you dont know, youll be fine with it..

http://www.cato.org/pub_display.php?pub_id=874&full=1

(Inflation and the Federal Reserve: The Consequences of Political Money Supply)

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General Interest > Science and Technology
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