Why does a rise in interest rates lead to a fall in inflation?

A rise in interest rates increases the cost of borrowing and increases the reward for saving. This means that there is a double effect, people are disincentivised to borrow money and spend it, as well as having additional incentives to save their money rather than spending it and putting it into the money cycle. This means that there are withdrawals from the circular flow of income, decreasing the overall amount of money in the economy. A fall in the amount of money in the economy means that there is a fall in the demand for products, decreasing the upward pressure on prices, creating a fall in inflation rates.

Answered by Karan S. Economics tutor

1439 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

Explain the statement that oligopolistic markets such as supermarkets or car manufacturers can be defined in terms of market structure or market conduct.


Explain, with the help of a diagram, the relationship between unemployment and the rate of inflation.


Explain the likely effects on the circular flow of income of the change in unemployment between 2013 and 2015.


Identify the characteristics of a monopolistically competitive market and explain why firms in this market are said to be inefficient. ​


We're here to help

contact us iconContact usWhatsapp logoMessage us on Whatsapptelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo
Cookie Preferences