Inflation

Economic IA

09/18/2011

Words: 743

India raises interest rate to fight inflation

In this article, India’s central bank has raised interest rates for the 12th time in 18 months in order to reduce their inflation rate. Inflationary is where the country has a persistent increase in the general price level, in fact, the article mentioned that the state-run oil firms raised petrol prices by 5% which means that an increase in prices, would cause high inflation therefore the country has to find a way to reduce it.

By using monetary policy, which is the use of interest rates and money supply to control the inflation, it allows the economy to boost up aggregate demand that means the total of all planned expenditure in an economy at each level of prices is going to increase and therefore decrease inflationary. It may also increasing employment and maintaining a balance on payments.

Graph of Monetary policy

In this graph it shows equilibrium point on the intersection at the money supply and the demand for money line because monetary policy controls the price stability in order to control inflation and maximize employment, if interest rate is higher, the Demand for money would decrease, therefore allows to reduce inflationary in short term period. However in consumption, by increasing interest rates, people may have to save more money, consume less, and borrow less money from the bank so that they could balance their own incomes. In investment, increase in interest rates gives a lower cost on borrowing and returning; which people may not invests in firms or other places. In government expenditure, when interest raises the government would face a high debt since it has been borrowing a lot of money from the central banks. In exports and imports, if interest rates increases, exports will become less competitive because the exchange rate is going to rise as well. However, it would also decrease in people’s demand on goods thus imports would be falling as well.

In the...