Question

be original and use your own word 1. Please choose one topics of your choice from chapters 5-7 and describe in your own words what you learned providing an explanation of 200 words for each topic. hoose inflation and interest rates add your references

Answer 1

Inflation: In simplest term inflation is increase in price. Inflation is very important topic in economics because it tells about how a particular economy is growing at particular time. Very high inflation can cause major concerns for the economy and it may even lead to hyperinflation it is not taken care at the correct time. Inflation reduce the purchasing power of the money. Inflation can be measured using basket of products which can be either at wholesale price or consumer price and form an index called wholesale price index and consumer price index respectively.

Interest rate: Interest rate is a amount due per period as a proportion of the amount lent. In other words interest rate tell about how much the future value of certain amount at a given interest rate. For the more riskier debt instrument interest rate is more because your risk is more. Similarly the price of debt instrument is inversely proportion to the interest rate which means increase in interest rate will lead to decrease in price of instruments. There are two types of interest rate nominal and real. Real interest rate can be derived from the nominal interest rate by subtracting the inflation.

Inflation and interest rate also has some relation, interest rate is mainly used by the central bank to keep check of inflation. Lower inflation leads to decrease of interest rate by central bank and similarly higher inflation leads to increase in interest rate by central bank by absorbing money supply from the system. Though this will not always works but it can be logical steps which can be taken by central bank.