Think of interest rate as the cost of borrowing money. If the price/cost goes up, demand goes down.
Less demand for money translates into lower aggregate demand in the economy. (People have less access to money, so they buy less goods.)
Since inflation is driven in large part by the level of aggregate demand in an economy, less demand for money will usually lead to lower inflation as well.
What is the effect of %26quot;increase in interest rate%26quot; on money demanded and Inflation and how ?
Generally speaking, a higher real interest rate reduces the demand for money because the cost of borrowing money becomes more expensive.
If interest rates increase, expected inflation decreases as a result or the reduced demand fr money.
This strategy to %26quot;fight inflation%26quot; is know as monetary policy.
What is the effect of %26quot;increase in interest rate%26quot; on money demanded and Inflation and how ?
Think the interest rate as the price of money... As the price of money increases the demand for it will decrease....
As the interest rates increases people will be less prone to consume and invest.... They are going to delay their consumption...
So suppliers facing this will decrease their prices to meet to demand...
Of course we should be talking about real interest rates in here and no expectations on the consumer side...
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