INterest Rates? Inflation? - Tilted Forum Project Discussion Community

wolfpack0102 · 01-19-2006, 11:08 PM

Would some one mind telling me how in hell raising the interest rate will curb inflation? One would think the opposite more money that people would spend the lower the price would be but i guess not

The inflation rate in Canada hasnt changed much yet the interest rate has been raised 3 times in the last year to curb inflation. This really sucks when you are wanting to get a mortgage in about 6 months from now

Rodney · 01-19-2006, 11:45 PM

In theory, raising interest rates makes it more expensive for both businesses and consumers to borrow money. So businesses cut back somewhat on expansion plans, and consumers cut down somewhat on spending. Less spending means less demand for goods and services which should mean, eventually, an excess of supply. And when there's too much of something around... the price doesn't usually go up. That's the theory.

It doesn't always work like that. Especially when governments keep increasing the money supply by running continual deficits. So on the one hand, we raise interest rates to make borrowing more expensive and thus reduce consumption and inflation; while on the other hand we allow the government to print more and more "free" money in the form of treasury bonds, which tends to _increase_ consumption and thus inflation.

BigBen · 01-20-2006, 09:53 AM

Look for a textbook at the local bookstore;

The search term you are looking for is "Macroeconomics"

The book will explain investment, government purchasing, monetary theory, interest rates, saving and the really big ones : Gross Domestic Product and Balance of Trade.

Remember that the interest rate is a measure of uncertainty in the economy as well; if you are a risk, then people will charge you a higher interest rate when you borrow.

How about the unemployment rate wrapped up in there too? If there is noone looking for work (full employment) then potential employers must offer a higher wage to convince people to work for them. This naturally raises the average wage rate. This money has to come from somewhere, and the firm then raises prices (inflation) to meet this new wage rate. If interest rates are hiked, firms are less likely to borrow money and expand their business, and thus they don't offer higher wages, and may even lay-off some people if the work slows down too much. Those people then look for work, forcing the wage rate down.

There is lots of stuff going on here, including the central bank and their monetary policy (which is dictated by the government, somewhat), the average employment rate, the risk in the market, and about a thousand different variables that very smart people look at to set the interest rate.

The government has little influence over the economy other than the tax rate, the amount of government spending, the central bank setting the interest rate (and thereby influencing the amount of money in the system with a floating currency).

The government, industry, and the general public does not give two-thirds of a rat fuck that you want to get a mortgage six months from now. Nothing personal, you understand; there are 30 million other people that are making financial decisions as well. Some of those people love high interest rates.

01-19-2006, 11:08 PM	#1 (permalink)
wolfpack0102 Crazy Location: Canada	INterest Rates? Inflation? Would some one mind telling me how in hell raising the interest rate will curb inflation? One would think the opposite more money that people would spend the lower the price would be but i guess not The inflation rate in Canada hasnt changed much yet the interest rate has been raised 3 times in the last year to curb inflation. This really sucks when you are wanting to get a mortgage in about 6 months from now

01-20-2006, 09:53 AM	#3 (permalink)
BigBen Comedian Location: Use the search button	Look for a textbook at the local bookstore; The search term you are looking for is "Macroeconomics" The book will explain investment, government purchasing, monetary theory, interest rates, saving and the really big ones : Gross Domestic Product and Balance of Trade. Remember that the interest rate is a measure of uncertainty in the economy as well; if you are a risk, then people will charge you a higher interest rate when you borrow. How about the unemployment rate wrapped up in there too? If there is noone looking for work (full employment) then potential employers must offer a higher wage to convince people to work for them. This naturally raises the average wage rate. This money has to come from somewhere, and the firm then raises prices (inflation) to meet this new wage rate. If interest rates are hiked, firms are less likely to borrow money and expand their business, and thus they don't offer higher wages, and may even lay-off some people if the work slows down too much. Those people then look for work, forcing the wage rate down. There is lots of stuff going on here, including the central bank and their monetary policy (which is dictated by the government, somewhat), the average employment rate, the risk in the market, and about a thousand different variables that very smart people look at to set the interest rate. The government has little influence over the economy other than the tax rate, the amount of government spending, the central bank setting the interest rate (and thereby influencing the amount of money in the system with a floating currency). The government, industry, and the general public does not give two-thirds of a rat fuck that you want to get a mortgage six months from now. Nothing personal, you understand; there are 30 million other people that are making financial decisions as well. Some of those people love high interest rates. __________________ 3.141592654 Hey, if you are impressed with my memorizing pi to 10 digits, you should see the size of my penis.

01-19-2006, 11:45 PM	#2 (permalink)
Rodney Observant Ruminant Location: Rich Wannabe Hippie Town	In theory, raising interest rates makes it more expensive for both businesses and consumers to borrow money. So businesses cut back somewhat on expansion plans, and consumers cut down somewhat on spending. Less spending means less demand for goods and services which should mean, eventually, an excess of supply. And when there's too much of something around... the price doesn't usually go up. That's the theory. It doesn't always work like that. Especially when governments keep increasing the money supply by running continual deficits. So on the one hand, we raise interest rates to make borrowing more expensive and thus reduce consumption and inflation; while on the other hand we allow the government to print more and more "free" money in the form of treasury bonds, which tends to _increase_ consumption and thus inflation.