Why does the government sometimes lower interest rates during inflation?
Inflation basically means a devaluation of the dollar. A dollar cannot buy as much as it used to. There are a few reasons this happens, but they all fall back onto simple laws of supply and demand. If supply goes down, price goes up. If demand goes down, price goes down. If something becomes more scarce, it becomes more expensive. If people don’t want to buy as much of something, the price will go down. To understnad inflation you need to put everything into a smaller scale. Imagine you have 10 people, and there are a total of 100 dollars between them. As long as everybody is exchanging money back and forth everything is fine. But what happens if everyone decides to take 2 dollars and stuff it in their mattress? Now there is no longer 100 dollars being passed back and forth, only 80. The supply of money in circulation has dropped by 20. Since the supply of that money has dropped, the price of everything has gone up. A classic case of inflation. Now there are quite a few ways to fix thi
