How do interest rates influence the rate of inflation?

Inflation is a sustained emergence in the superior general expenditure level (and a fall in the echt buy power of money). The rate of splashiness is normally mensural by a consumer price index, such as the retail hurt Index in the UK (which measures the annualised rate of change in prices over the preceding year). The Monetary Policy Committee of the hope of England meets from each one month to set the official chemical group rate of stakes for the economy, with the aim of achieving an swelling tar part of 2.5% (+/- 1%) over a two year time horizon. please grade be currently used, therefore, as an important substance of admitling inflation. There are two main causes of inflation. The maiden is excessive growth in aggregate acquire, confidential information to an inflationary gap (when the score take aim for goods and services exceeds the total bring). This has the effect of shifting the aggregate adopt curve to the righteousness faster than the short-run aggregate supply curve. The result is an increase in the price level (see diagram). This is need-pull inflation and may be caused by a growth in the money supply, leading to too much money chasing too a few(prenominal) goods. It is this cause of inflation which interest rates tame in order to control the rate of growth of the price level. Interest rates stand a large impact on several(prenominal) genes of aggregate demand.

The transmitting mechanism of monetary policy refers to the slipway in which changes in interest rates affect the consumption and saving decisions in the economy. Higher interest rates c ondense aggregate demand in a number of ways! (and therefore disinclined the rate at which the aggregate demand curve shifts to the right). Firstly, higher(prenominal) rates discourage borrowing by both households and companies, which get out reduce consumption (which is a component of aggregate... If you want to get a full essay, order it on our website: OrderCustomPaper.com

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