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fatsam

Interest Rate Vs Inflation

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I hear alot of people on this website talk about the way to curb inflation is to increase the base rate, could anyone please explain this to me, as i'm not sure how this system works.

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It's probably quite a complex subject but I would say a simple explanation is that if IR goes up, it's more expensive to borrow money. This makes people and companies more reluctant to spend which reduces demand. If demand goes down then the competition that causes price increases reduces, causing inflation to go down.

Add to that anyone....

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The theory is that when borrowing becomes more expensive demand for loans falls. Demand for goods that are purchased with loans falls, and the lower demand should exert a downward pressure on prices.

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Only most of import inflation is caused by a limit of supply or by a rise in production/extraction costs e.g. failure of wheat/rice crops. Somehow the text book response is still to dampen demand by reducing the supply of money. :blink:

Edited by Reluctant Heretic

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  • 140 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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