• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

CourseWork3- Inflation and Intrest Rates

Extracts from this document...


India's central bank raises key interest rates by quarter point to contain inflation One 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 . ...read more.


If, there is a high rate of inflation, then banks raise their nominal interest rates in order to keep the real rate that they earn positive. As Inflation leads to a rise in the general price level money loses its value. When inflation is high, people may lose confidence in money as the real value of savings is severely reduced. Savers will lose out if nominal interest rates are lower than inflation - leading to negative real interest rates. Consequently, there has been a 0.25% (from 6.25% to 6.50%) increase in the bank's interest rates on loans that are being borrowed. It is simple to understand that an increase in these rates, dissuade consumers from taking loans eventually preventing the public in India from consuming more. The diagram below shows an actual fall in the prices ( a suitable solution to level the increase in prices in India)- " inflationary pressures, which were already strong, have intensified in emerging economies due to sharp increases in food, energy and commodity prices." ...read more.


Investment is not vulnerable to changes in expectations and so a rise in interest rates will decrease aggregate demand; eventually decreasing inflation. The author also briefly mentions briefly states that economies of 'more developed' nations such as United States of America are also recovering from recession, faster than expected. However the author fails to put light on how this is taking place there and whether the U.S government is using the same Monetarist method by increasing interest rates like in India. It is evident from the article that the Indian Economy is slowly and steadily coming out of recession. Measures at controlling inflation in India have been successful especially in the Agricultural Sectors of India. The growing economy of India continues to go even through the inflation- "The robustness of growth is also reflected in corporate sales, tax revenues and bank credit, notwithstanding some moderation in the index of industrial production." TANVI SHETH B.D SOMANI INTERNATIONAL SCHOOL 002602-020 ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related International Baccalaureate Economics essays

  1. Is it possible to reduce unemployment without increasing inflation

    The later is determined in the long term by the money supply while the natural rate of unemployment is the equilibrium rate in the long term, when there is only voluntary and/or frictional unemployment. The new Keynesians reacted in the nineties by formulating a very similar concept, the so-called Non-Accelerating Rate of Unemployment (NAIRU).

  2. Commentary on Indian News Article "Food prices push inflation to 6.95%"

    India's country's wealth is increasing, thus resulting in an increase in consumer wealth. This increases consumer confident; therefore they are more likely to spend more, causing the AD curve to shift to the right. If food patterns are changed, this could indicate that for a given level of income, consumption would increase causing AD to increase, ceteris paribus.

  1. Evaluating interest rates

    than foreign speculators will move their money to benefit from the rise of interest rate, this means that they will sell for example pounds to buy Euros. There will be a higher demand for Euros which means that the value of the Euros will increase.

  2. Economics Higher Level Coursework

    The firm will be closer to the minimum efficient scale, where the internal EOS's are fully exploited. Here with lower costs, the prices can be forced down, increasing its competitiveness with existing firms, which is important as the generic drug market is dominated by pressure on prices.

  1. Economics Coursework - Demand&Supply

    The UK is the only major European market not to implement a scheme." Edmund King, the president of the AA, said: "The latest figures show the stark difference between a country with a scrappage scheme and one without.

  2. Role of ICT for "Make in India" government initiative.

    India?s import of ICT are surging when compared to export of ICT goods for the past few years. Exporting is a great way to increase country?s sales potential. Exporting helps in changing a idle production to work. Exporting products that are global in scope and wide range of acceptance is the best way to enjoy pure economies of sale.

  1. Advantages and Disadvantages of High and Low Exchange Rates & of a Fixed and ...

    clear that it is able to defend its currency by the buying and selling of foreign currencies. Setting the level of the fixed exchange rate is not simple. If the rate is set at the wrong level, export firms may find a lack of competitiveness in foreign markets.

  2. Identify the components of Aggregate Demand. Explain the impact on an economy of ...

    of goods although they are not wanted in such a quantity anymore. So the level of demand and supply decreases, to a point with quite high RGDP and output, but with now a low level of inflation. In the second situation we begin from the best economic wealth point (which

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work