Explain how the Central Bank can increase the interest rate in the economy.

Expert Solution

The central bank usually increases interest rates when it is predicted that inflation will rise above its inflation target. Higher interest rates tend to yield moderate growth. Higher interest rates increase borrowing costs, reduce disposable income and, consequently, limit consumer spending growth. Higher interest rates tend to lower inflationary pressures, and cause exchange rate appreciation.

Increased incentive to save, instead of spending. Higher interest rates make saving in a deposit account more attractive given the interest earned.
Rising interest rates are affecting consumers and businesses alike. The economy is therefore likely to experience falls in both consumption and investment.

Rahul Sunny answered 1 month ago

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