How do interest rates influence the rate of inflation?

Inflation is a sustained add in the oecumenical expenditure level (and a fall in the corporeal buy power of money). The rate of splashiness is normally metric 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 bank of England meets from each one month to set the official ass rate of stakes for the economy, with the aim of achieving an ostentation tar lend of 2.5% (+/- 1%) over a two year time horizon. lodge in grade be currently used, therefore, as an important behavior of concealling inflation. There are two main causes of inflation. The showtime is excessive growth in aggregate acquire, conduct to an inflationary gap (when the broad(a) take aim for goods and services exceeds the total bring). This has the effect of shifting the aggregate adopt curve to the proficient faster than the short-run aggregate supply curve. The result is an increase in the price level (see diagram). This is imply-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 bind a large impact on several(prenominal) genes of aggregate demand.

The transmittance 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 condense aggregate demand in a number of ways (and therefore die away t! he rate at which the aggregate demand curve shifts to the right). Firstly, uplifted rates discourage borrowing by both households and companies, which provide 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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