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How to Compare interest rate and inflation?
Interest rate
It is either the cost of money borrowed or reward for saving the money. Generally, interest rates are calculated in terms of percentages. Public borrow money from banks in the form of loans. Banks borrows money from public in form of deposits and pays interest for money deposits. Interest rates can be
- Fixed interest rates: charges are fixed throughout the loan life
- Variable interest rates: charges changes with prime rate
Increase in interest rates results in the following −
- Decrease in inflation.
- Decrease in circulation of money in market.
- Expense borrowing.
- Decrease in demand of goods and services.
- Price of goods and services will decrease.
Decrease of interest rate results in the following −
- Increase in inflation.
- Increase in circulation of money in market.
- Borrowing becomes cheap.
- Increase in demand of goods and services.
- Price of goods and services will increase.
Inflation
It is an economic indicator which indicates rate at which prices of goods are raising and services in economy. It also measured in percentages. Rise or fall in percentages from previous periods. Causes for inflations are monetary policy, fiscal policy, demand pull inflation, cost push inflation and exchange rates. Types of inflation are
- Demand pull inflation: demand for goods/service are higher than production capacity
- Cost push inflation: increase in cost of production
- Built in inflation: expectations of future inflations
Increase in inflation results in the following −
- Decrease in interest rate.
- Increase in money circulation in market.
- Borrowing will become cheap.
- Increase in demand of goods and service.
- Price for goods and service will increase.
Decrease in inflation results in the following −
- Increase in interest rate.
- Decrease in money circulation in market.
- Borrowing will become expensive.
- Decrease in goods and services demand.
- Price of goods and services will decrease.
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