Which of the following is correct about interest movements and inflation? a. Interest rates move inversely...
Which of the following is correct about interest movements and inflation?
a. Interest rates move inversely with inflation.
b. Interest rates vary directly with expected inflation.
c. Interest rates vary directly with past inflation rates.
d. Inflation is impacted by expected interest rates.
Homework Answers
Suppose there is a fall in interest rates. It will induce the individuals to borrow more money and this will increase the money in hand of people. Increase in the money in hand will increase the purchasing power of individuals. As a result of this, the demand will increase in the market with no change in supply which will increase the overall price in the economy and hence inflation in the economy. So, interest rates move inversely with inflation.
Hence, the correct option is a.
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