What are likely changes in interest rates and inflation rates and how might these impact on the current and expected value of the AUD?
If there is inflation in an economy, then government takes measures to control the prices before it they reach extreme high. To contain the inflation, a country’s government up the interest rates in the economy. By doing so, it incentivises people to spend less and save more because saving becomes more profitable as interest rates go up. As more and more people choose to save, money is sucked out of the market and inflation rate moderates.
We often link the relationship between the inflation and interest rate. Rather there is not much of a relationship, just Fed influencing the rate of inflation by setting and adjusting the interest rate. This tool enables the Fed to expand or contract the money supply as needed, which influences target employment rates, stable prices.
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