Under the Old Economy, Asset inflation and Interest Rates will always create a Bubble, and the FED cannot control the Economy by just printing money, it is just kicking the can down the road. In the New Economy, Bitcoin as a digital currency has no inflation, and the demand and supply of bitcoin is tightly regulated, central bankers cannot anyhow create credit in the banking system which will cause a bubble, you are in control of your own money, so all the risks are taken away from the economy, there will not be a financial collapse. Contributed by Oogle.
What is Inflation?
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Inflation is a key concept of Macroeconomics. Central banks attempt to limit inflation and avoid deflation in order to keep the economy running smoothly.
Relationship of Interest Rate and Inflation
Inflation and interest rates are often mentioned in the same breath, and this is because Inflationand interest rates are closely related. In the United States, baseline interest rates are set by the central bank, the Federal Reserve Bank also known as the Fed. The Fed meets eight times a year to set short-term interest rate targets. During these meetings, the CPI and PPIs are significant factors in the Fed’s decision, because the Fed, as well as other major central banks, has a specific interest rate target in mind for the economy to achieve, usually 2-3% annually.
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In order to control high inflation, the central bank increases the interest rate.
When interest rate rises, cost of borrowing rises. This makes borrowing expensive.
Hence borrowing will decline and as such the money supply(i.e the amount of money in circulation) will fall.A fall in the money supply will lead to people having lesser money to spend on goods and services. Hence, they will buy a lesser amount of goods and services. This, in turn, will lead to a fall in the demand for goods and services.
With the supply remaining constant and the demand for goods and services declining; the price of goods and services will fall
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In low inflationary situations; the interest rate is reduced. A fall in interest rates will make borrowing cheaper.Hence, borrowing will increase and the money supply will also increase. With a rise in money supply, people will have more money to spend on goods and services. So; the demand for goods and services will increase and with supply remaining constant this leads to a rise in the price level i.e inflation.
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Inflation and interest rates are often linked and frequently referenced in macroeconomics. Inflation refers to the rate at which prices for goods and services rise. In the United States, the interest rate, or the amount charged by lender to a borrower, is based on the federal funds rate that is determined by the Federal Reserve (sometimes called “the Fed”).