Controlling the Money Supply: One way in which interest rates can be used to manage inflation is by controlling the money supply. When interest rates are low, borrowing becomes cheaper and more attractive to consumers and businesses. This can lead to increased spending and investment, which can drive up demand for goods and services and cause prices to rise. Conversely, when interest rates are high, borrowing becomes more expensive, which can reduce spending and investment and slow down economic growth. This can help to prevent prices from rising too quickly and keep inflation in check.
Encouraging Saving: High interest rates can also encourage people to save money instead of spending it. This can help to reduce demand for goods and services and slow down inflation. When interest rates are high, people can earn more money by keeping their savings in the bank, which can make saving more attractive than spending.
