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

1400 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

Explain why and when government spending leads to inflation


What are the potential disadvantages of Trades Unions?


Explain how a fall in interest rates would affect aggregate demand (5 marks)


Evaluate policies the government can use to increase the rate of economic growth.


We're here to help

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

© MyTutorWeb Ltd 2013–2024

Terms & Conditions|Privacy Policy
Cookie Preferences