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What is the relation of inflation and interest rate?

+2 votes
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posted Mar 3, 2015 by anonymous

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2 Answers

+1 vote

Interest rate is normally set based on inflation rate; if inflation is going up then interest rate is increased and vice versa.

answer Mar 9, 2015 by Neti Srinivas
+1 vote

Higher the interest rate means people have incentive to keep the cash in bank rather then in pocket or spend which reduces the money supply which reduces the inflation.

On the opposite side lower interest rates put more borrowing power in the hands of consumers and when consumers spend more, the economy grows, naturally creating inflation.

answer Mar 9, 2015 by anonymous
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