Theme 4 - 4.2.2 - Assesment Of A Country As A Market

Question 1

How does raising interest rates decrease inflation ?

Answer 1

Because then people wouldn’t want to spend a lot of money on their credit cards because the more money that they would spend - the more they would have to to pay back because of the high interest rates therefore less money is spent on the highly inflated items and therefore the demand for the highly inflated items would decrease and the companies would have to lower the price so that the people would then want to buy these items as they cost less and they wouldn’t have to pay back so much money as they are spending less. But people that don’t take out loans or don’t use credit cards then raising interest rates also decreases inflation because if inflation rates go up then more people would put money into saving accounts and spend less as their money is going into savings as when inflation rates are high then you get more money back from the bank

Question 2

What is inflation ?

Answer 2

It is the rate of the increase of prices over time
- this could be due to the government printing more money etc

Question 3

What are interest rates ?

Answer 3

It is the cost of borrowing money - so if you borrow money that has interest attached to it then you have to pay a bit of money back