CourseWork3- Inflation and Intrest Rates

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India's central bank raises key interest rates by quarter point to contain inflationOne of a government’s macroeconomic goals is price stability and an attempt to maintain a low and stable rate of inflation. Inflation is defined as a persistent increase in the average price level of the economy. Inflation is measure through the Consumer Price Index. It indicates a fall in the value of money when the economy is at or approaching the point of full employment. This article concerns itself with India’s decision to increase interest rates in an effort to suppress levels of inflation. Inflation can be a cause of various economical changes such as increasing aggregate demand in a country or an increase in the cost of production of goods. Low interest rates in a country encourage consumers to buy more, eventually leading to a greater demand than supply; causing inflated prices
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.The diagram below shows us quite clearly how the Demand Pull Inflation works. Demand Pull Inflation, as the name itself suggests is caused by an excessive demand in the market.This demand  results in an increase in average prices and also real output.Cost Push Inflation is caused  due to an increase in cost of production. An increase in costs lead to a fall short run aggregate supply from SRAS 1 to SRAS 2 reflecting  increase of prices.The author mentions the effects of inflation in the economy and the rising prices of consumer goods in the Indian Economy- “India's inflation rate jumped ...

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