Eser asked in Social ScienceEconomics · 5 months ago

Does the existence of interest rates in the first place cause inflation?

Update:

example like the interest on your credit card

that extra money that is charged

4 Answers

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  • Zirp
    Lv 7
    5 months ago

    to a large extent , interest EQUALS inflation. If you borrow money to buy what you need for your business, you have to demand higher prices for what you sell than if you had the money already. otherwise you can't pay the interest on the loan

  • Oiy
    Lv 5
    5 months ago

    The policy rate is instrumental. It should kill inflation which is higher than 2%. In economics, the interest rate is not the cause of inflation, it's an income, including in national income. The real cause of inflation is the money supply.

    • Lv 4
      5 months agoReport

      also, in a closed system, with fixed output & fixed tastes, fixed M maintains, eg, the amount of m corresponding to a unit of a particular item, so if M changes differently than in proportion to changes in units of output, that tends to be inflationary or deflationary(negatively inflationary)

  • 5 months ago

    I think there may be some cause-and-effect there, but it would be in the other direction.

    When unemployment goes below 5%, the Fed usually raises interest rates to 'chill down' the economy. The idea is that low unemployment brings inflation, too much money chasing too little goods. But the real reason is to keep unemployment over 5%, because lower than that it puts upward pressure on wages. Lower wages, more unemployment, would both tend to have an anti-inflationary effect.

  • Anonymous
    5 months ago

    Actually interest rates are used to combat inflation.

    When the rates go up people have less money and buying slows , with less demand prices come down . Unfortunately people’s jobs are lost.

    It’s a cycle

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