Question

What is happening now with inflation in the U.S.? Who gains and who loses if interest rates go up? What do you think the Fed should do, if anything, to stabilize the inflation rate? What could cause the U.S. to experience inflation such as in Venezuela?

Answer 1

The inflation rate in the United States has been falling. Its ten years since the crisis hit the economy and still the economy is experiencing a very low inflation rate which is below the targeted inflation rate in the economy. This has also become a cause of worry for the economy as inflation rates are not rising in the economy. Weakness in the inflation rate is one of the reasons that rate rise by the Fed is on the hold now. If interest rates go up then creditors gain as they will receive more interest money than decided and debtors will lose as they will have to pay more money to the creditors.

The Fed should try to increase the money supply now to reduce rate of interest and increase investment expenditure which will increase overall level of aggregate demand in the economy and thus increase inflation rate in the economy. If increase in aggregate demand in the economy is not accompanied by increase in the level of aggregate supply by the firms, then the U.S. will experience inflation such as in Venezuela.