Describe the relationship between interest rates set by the Fed and inflation rates.

Expert Solution

Interest rate are set by the Federal Reserve through the monetary policy of the Federal Reserve and they will be having a positive relationship with the inflation in the economy.

When there will be a higher rate of inflation in the economy, it will mean that there is a higher money flow in the economy as there is a higher demand in the economy and the Federal Reserve will be trying to raise the interest rate in order to curb the inflation rate in the economy so they can curtail the money supply in the economy and stabilize the economy.

When there would be a lower rate of inflation in the economy, it will mean that there is a very low level of demand in the economy and Federal Reserve will be cutting up on the interest rate in order to stimulate the demand in the economy and stimulate the inflation in the economy also when the inflation are lower, Federal Reserve will be lowering the interest rate as well.

Hence, it can be said that there is a positive relationship between the interest rate set by the Federal Reserve and the inflation rates.

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