Relationship Between Inflation and Bank Interest Rates.docx - Running Head RELATIONSHIP BETWEEN INFLATION AND BANK INTEREST RATES 1 Relationship Between

Relationship Between Inflation and Bank Interest Rates.docx...

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Running Head: RELATIONSHIP BETWEEN INFLATION AND BANK INTEREST RATES 1 Relationship Between Inflation and Bank Interest Rates Name Institution Date
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RELATIONSHIP BETWEEN INFLATION AND BANK INTEREST RATES 2 Relationship Between Inflation and Bank Interest Rates. Interest rates and inflation are always mentioned in the same dimension and this is due to the two being closely interrelated and always working in a tandem. In the U.S the baseline interest rates are usually determined by the central bank, Federal Reserve Bank which is also known as the Fed. The Federal Reserve Bank meet at least eight times in a year where it set the interest rate targets. The CPIs and PPIs form the fundamental units in making the Fed decisions. This is because Fed and other major central banks usually have given interest rates which are predetermined and are deemed achievable by the economy. It usually range between 2-3% in a year and it is referred to as inflation targeting (The Economist, 2017). Simply put inflation is the cost of saving money while interest rate can be termed as the cost of borrowing the same money. Since inflation is usually an independent occurrence affected by the supply of money in the economy, central banks on the other hand uses the interest rate to control the supply of money in the economy. As mentioned before interest rates and inflation always work in a tandem. Interest rates tend to rise when the inflation goes up and when inflation goes down the interest rates also comes down. A proper understanding on how these two relate can help individuals to make decisions on whether to borrow money, plan to pay back their loans or predict if life is becoming much expensive than before. While the connection between inflation and interest rates may be clear, in some situations the connection isn't obvious thus to understand their relationship properly it is good if we look on real-world situations. Altering the base interest rate is key function of the federal bank in the process to maintain a stable economy. While it may seem to be a very simple task, this is a very tricky
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RELATIONSHIP BETWEEN INFLATION AND BANK INTEREST RATES 3 undertaking which requires the proper understanding all the dynamics which are involved in the relationship between the interest rates and inflation. To begin with increasing the base interest
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  • Fall '14
  • James Makau

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