inflation (1 Viewer)

[ToO LaZy ^*]

how does increasing interest rates by the RBA reduce inflationary pressures?...

is it because when interest rates are high, people tend to spend less, therefore lowering consumption which will lower the aggregate demand and hence lead to slower economic growth----> which reduces inflationary pressures..?

i just want to make sure i have the right idea?...corrections are most welcome

 

[George W. Bush]

Tightening monetary policy increases investment in interest-bearing assets (read bonds) and slows the growth of aggregate demand, which is the driving factor in inflation. This is because when the economy is near full employment, if AD were to increase, most of the GDP growth would come from an increase in prices of the goods, rather than extra production (as the economy can't find the resources to make what is demanded). So by slowing the growth in aggregate demand, there is downward pressure on the general price level.

 

[ToO LaZy ^*]

ohk..
so...
increase AD--> increase in inflation--> tightening monetary policy--> decrease in AD--> reduction in inflationary pressures..

 

[George W. Bush]

yes.

it all gets a bit complicated when we include imports, but that's the basic idea.

 

[aditya]

george w bush ur in yr 12 right?

 

[George W. Bush]

I was going to think of a clever way to say yes, but I couldn't come up with anything

 

[ToO LaZy ^*]

Originally posted by George W. Bush
I was going to think of a clever way to say yes, but I couldn't come up with anything

psssssssst..aditya....i think that's a yes...