which of the following is true about inflation and interest rates?
Which of the following is true about inflation and interest rates?
Answer:
Inflation and interest rates are closely related economic concepts. Here are some truths about inflation and interest rates:
1. Inverse Relationship: Inflation and interest rates generally have an inverse relationship. When inflation is high, central banks tend to raise interest rates to curb spending and reduce the money supply in the economy. Conversely, when inflation is low, central banks may lower interest rates to stimulate spending and investment.
2. Purchasing Power: High inflation erodes the purchasing power of a currency. Individuals holding cash or fixed-income investments may see the real value of their money decrease as prices rise. To combat this loss of purchasing power, investors may demand higher interest rates to compensate for inflation.
3. Real Interest Rates: Real interest rates are nominal interest rates adjusted for inflation. It is essential to consider real interest rates when evaluating the true return on an investment. If inflation exceeds the nominal interest rate, the real return on an investment may be negative.
4. Economic Indicators: Inflation and interest rates are key economic indicators. Central banks closely monitor these factors as they impact consumer spending, borrowing costs, investment decisions, and overall economic growth. Managing inflation and interest rates is a critical part of monetary policy for economic stability.