ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If prices rise faster than their target, central banks tighten monetary policy by increasing interest rates or other hawkish policies. Higher interest rates make borrowing more expensive, curtailing both consumption and investment, both of which rely heavily on credit.

Detailed explanation-2: -Even so, interest rate hikes are known as the central bank’s one major tool to lower inflation, which it does by raising the cost of borrowing money to curb the demand for goods and services. Economists won’t know until later if the Fed’s moves were successful or not.

Detailed explanation-3: -This increases the supply of money in the economy and also the demand. As a result, prices of the commodities rise and cause inflation. In this scenario, the RBI tends to increase the interest rates to reduce the money supply. People, on the other hand, tend to borrow less and save more when interest rates are high.

Detailed explanation-4: -The fed funds rate impacts how much commercial banks charge each other for short-term loans. A higher rate means more expensive borrowing costs, which can reduce demand among banks and other financial institutions to borrow money.

Detailed explanation-5: -If the Fed increases the interest rate of reserves, banks will want to keep higher reserves. This will reduce the money multiplier as higher reserves effectively mean a higher reserve ratio. A fall in the money multiplier will reduce the loans given out by banks, reducing the money supply.