Why would a government's central bank raise interest rates when inflation is high?
Understand the Problem
The question asks why a central bank might raise interest rates in response to high inflation, exploring the relationship between interest rates, consumer spending, and inflation.
Answer
To encourage people to spend less which can bring prices down.
The correct answer is to encourage people to spend less which can bring prices down.
Answer for screen readers
The correct answer is to encourage people to spend less which can bring prices down.
More Information
Raising interest rates makes borrowing more expensive, which tends to reduce consumer spending and investment. This decrease in demand can help lower inflation.
Tips
A common mistake is thinking that higher interest rates encourage spending. However, they actually make borrowing more costly, reducing spending.
Sources
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