How does lowering interest rates at the Fed cause inflation to rise?
When interest rates go down, people are borrowing more money and spending more. People who need money are borrowing more because the rates are lower – think mortgages and car loans. When the rates fall wouldn’t YOU want to hop on the low rate train? When people have borrowed money they have the propensity to spend it. When spending goes up, inflation goes up because there’s more money “out there”. When inflation goes up, our dollar goes down. Does that make sense? More money out there means it’s not worth as much. Oh yeah, cost of goods go up because they print more money and it’s still not worth that much. Another thing that happens is that even though money is not worth that much in this situation because they keep printing more of it to keep in balance with the amount people are borrowing, your wage typically stays the same. This isn’t good for workers but it’s a temporary fix to the economy. It gets people spending. Remember that the government lowers interests rates to encourage s
