Interest Rates & Inflation

Question 1

What are interest rates?

Answer 1

(1) Cost of Money (borrower’s perspective); (2) Return of Money (lender’s perspective).

Question 2

Why would interest rates rise?

Answer 2

Inflation, too much money in circulation

Question 3

Why would interest rates fall?

Answer 3

Growth is threatened/ recession appears to be a possibility

Question 4

Contributing factors to Inflation

Answer 4

(i) Low (“accommodative”) interest rates; (ii) increased money supply; (iii) high velocity of money; (iv) rising commodity prices - impact on consumer prices and producer prices; (v) low unemployment; (vi) rising wages.