ECONOMICS
INFLATION
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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interest rates are raised to attract domestic deposit in the face of a rapidly growing economy
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Interest rates are raised to discourage domestic credit consumption.
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Interest rates are raised to improve the purchasing power of the domestic currency
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Interest rates are raised to attract cheaper foreign imports in the face of lower domestic production
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Detailed explanation-1: -Inflation will also affect interest rate levels. The higher the inflation rate, the more interest rates are likely to rise. This occurs because lenders will demand higher interest rates as compensation for the decrease in purchasing power of the money they are paid in the future.
Detailed explanation-2: -The inflation rate and interest rates are intrinsically linked. When the inflation rate is high, interest rates tend to rise too – so although it costs you more to borrow and spend, you could also earn more on the money you save. When the inflation rate is low, interest rates usually go down.
Detailed explanation-3: -In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.