D 139 LOIDON 0939 GUINDRE /modules/947/watch Home – myOneonta ion and Control > > It increases the demand for purchases which brings down the prices of goods Podle Mare P odule: Currency Valuation Drivers D21 Class Code for BMC-23FA FINC X B Bloomberg for Education It increases savings which brings down the cost of goods It reduces demand for borrowing across all sectors of the economy which, with a lag, brings down prices for goods and services ? Watch the Quicktake segment below. When central banks raise interest rates, how does this help control inflation? — indhem Mills Search X Wednalo Click to open/close Quicktake. New tab D x+ Next Module: Currency Risk ? Fullscreen A ?
The Correct Answer and Explanation is :
The correct answer is: It reduces demand for borrowing across all sectors of the economy, which, with a lag, brings down prices for goods and services.
Explanation:
When central banks raise interest rates, the primary goal is to control inflation. Inflation occurs when the demand for goods and services outpaces supply, leading to price increases. Central banks like the Federal Reserve use interest rates as a tool to regulate economic growth and manage inflation.
- Impact on Borrowing: Higher interest rates make borrowing more expensive for consumers and businesses. When loans become more costly, both individuals and companies are less likely to take out loans for big purchases, investments, or expansions. This reduces overall demand in the economy.
- Reduction in Demand: As borrowing declines, there is less money circulating in the economy. For businesses, reduced borrowing means fewer investments in growth, such as buying new equipment or hiring more employees. For consumers, it results in fewer large purchases, like homes and cars. This decrease in demand for goods and services helps alleviate inflationary pressure.
- Lag Effect: The full impact of higher interest rates may not be immediate. It takes time for changes in borrowing behavior to affect spending and ultimately impact prices. As the demand for goods and services slows, businesses may lower prices or halt price increases, leading to a gradual reduction in inflation.
- Long-term Effects: While this process can take time, it helps to stabilize prices. By moderating inflation, central banks can maintain a healthy economy where prices don’t increase too rapidly, which can erode purchasing power and lead to economic instability.
In summary, raising interest rates helps control inflation by making borrowing more expensive, which reduces overall demand in the economy, leading to slower price increases over time.