FIRST DRAFT 1
Impact of Interest Rates on Inflation
James C. Goggans
Embry Riddle Aeronautical University
Professor Audra Sherwood
Economics 211
21 November 2021
FIRST DRAFT 2
Introduction
Interest rates play a significant role in shaping a country's economy. The Federal Reserve
System in the US determines the interest rates, which determine the prices of goods and
services in the market (Ferreira & Shousha, 2021). The two concepts are linked, and
academicians have established both direct and inverse relationships between the two
concepts. Some academicians argue that since both inflation and interest rates are driven by
money, they have a direct relationship such that an increase in interest rates increases the rate
of inflation and vice versa. However, the money quantity theory establishes an inverse
relationship between interest rates and inflation; High-interest rates reduce money circulation,
which leads to a reduction in prices. On the other hand, low-interest rates increase money
circulation, which increases the price of goods and services.
Literature Review
Definition of Inflation
Academicians define inflation differently. However, the most harmonizing definition of
inflation is the decline in a currency's value or purchasing power. The decline takes place
over time and affects the general price of goods and services in the market. When there is
inflation, a currency unit buys less than what it used to but previously. For example, if the
price of bread increases from $ 1 to $ 1.50, it means the value of the currency has reduced,
and more money has to be used to buy bread. When there is inflation, the money supply
increases in an economy faster than the production of goods and services required in the
market. This leads to an imbalance between supply and demand in a country's economy.
Definition of Interest rate
Kiley & Roberts (2017) define interest rate as the amount a lender charges a borrower,
expressed as a percentage of the principal. It is typically represented as an annual percentage,
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All paragraphs need to be indented 1/ 2 inch.
FIRST DRAFT 3
and the borrower pays back the principal and the interest. According to the International
Monetary fund, interest rates serves three functions;
It serves as a return on the financial asset so that it can promote deferred consumption, a
saving that will facilitate future activities.
It is also considered a cost of capital that will determine the amount of money that can be
loaned to members of the public.
The interest rates within a country and the return rate of foreign financial assets are normally
evaded against inflation.
Based on these functions, it is clear that interest rates impact the economy dramatically. It
also affects other variables that will influence investment activities that shape economic
growth and a country's development.
What is the relationship between in ...
FIRST DRAFT 1Impact of Interest Rates on InflationJame
1. FIRST DRAFT 1
Impact of Interest Rates on Inflation
James C. Goggans
Embry Riddle Aeronautical University
Professor Audra Sherwood
Economics 211
21 November 2021
FIRST DRAFT 2
Introduction
Interest rates play a significant role in shaping a country's
economy. The Federal Reserve
System in the US determines the interest rates, which determine
the prices of goods and
services in the market (Ferreira & Shousha, 2021). The two
concepts are linked, and
academicians have established both direct and inverse
relationships between the two
2. concepts. Some academicians argue that since both inflation and
interest rates are driven by
money, they have a direct relationship such that an increase i n
interest rates increases the rate
of inflation and vice versa. However, the money quantity theory
establishes an inverse
relationship between interest rates and inflation; High-interest
rates reduce money circulation,
which leads to a reduction in prices. On the other hand, low-
interest rates increase money
circulation, which increases the price of goods and services.
Literature Review
Definition of Inflation
Academicians define inflation differently. However, the most
harmonizing definition of
inflation is the decline in a currency's value or purchasing
power. The decline takes place
over time and affects the general price of goods and services in
the market. When there is
inflation, a currency unit buys less than what it used to but
previously. For example, if the
price of bread increases from $ 1 to $ 1.50, it means the value
of the currency has reduced,
3. and more money has to be used to buy bread. When there is
inflation, the money supply
increases in an economy faster than the production of goods and
services required in the
market. This leads to an imbalance between supply and demand
in a country's economy.
Definition of Interest rate
Kiley & Roberts (2017) define interest rate as the amount a
lender charges a borrower,
expressed as a percentage of the principal. It is typically
represented as an annual percentage,
Audra Sherwood
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All paragraphs need to be indented 1/ 2 inch.
FIRST DRAFT 3
and the borrower pays back the principal and the interest.
According to the International
Monetary fund, interest rates serves three functions;
It serves as a return on the financial asset so that it can promote
deferred consumption, a
saving that will facilitate future activities.
It is also considered a cost of capital that will determine the
4. amount of money that can be
loaned to members of the public.
The interest rates within a country and the return rate of foreign
financial assets are normally
evaded against inflation.
Based on these functions, it is clear that interest rates impact
the economy dramatically. It
also affects other variables that will influence investment
activities that shape economic
growth and a country's development.
What is the relationship between inflation and Interest rate?
Different scholars establish the relationship between inflation
and interest rate differently.
Gunel (2017) establishes a positive relationship between
inflation and interest rates based on
the Fischer hypothesis. He argues that both interest rate and
inflation are driven by money
and affect demand and supply in an economy.
Geetha et al. (2011) pose that based on the financial theory, the
inflation rate in an economy
implies an increase in the price of goods and services. When
there is inflation, the value of
5. money goes down because a lot of money is chasing a few
goods and services available in the
market. Geetha’s concept implies that both inflation and interest
rates are driven by money,
and inflation will lower the demand for money. Consequently,
the value at which the money
was borrowed for reinjection into the production of goods and
services will reduce, hence
creating a positive relationship.
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All paragraphs need to be at least 3 or more sentences in length.
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Do you intend to list your content?
FIRST DRAFT 4
Although some academicians argue that there is a positive
relationship between interest rates
and inflation, studies indicate that the two variables are linked
inversely; an increase in
interest rate reduces inflation while a reduction in interest rate
6. increases inflation. Research
links interest rates to economic variables such as purchasing
power, consumer spending,
demand, and supply, determining market prices.
An increase in interest rate lowers purchasing power because
few people have access to
loans. The high-interest rates increase the value of money by
increasing its purchasing power,
meaning the prices will be low. On the other hand, many people
can borrow loans (Brown,
2020). This increases the supply of money in the economy and
lowers the marginal value of
money. More money means more spending and more demand,
which calls for an increase in
prices (inflation).
Theoretical Framework
The quantity theory of money suggests that the price of goods
and services in an economy is
proportional to the money supply in that economy. If the
amount of money supplies
increases, then the price of goods and services also increases.
For example, when the money
supply increases by 20%, goods and services also increase by
7. 20%. This implies that the
consumer will have to pay 205 more for goods and services
compared to what they paid
before the price increase. When price increases, it will result in
rising inflation. The force that
shapes supply and demand for goods and services in an
economy will affect the supply and
demand for money (Ahiakpor, 2019). When the supply of money
goes up, the marginal value
of money reduces. In other words, when the supply of money
increases, the purchasing value
of a unit decreases if other factors are kept constant. The
economy adjusts to the decrease in
value by increasing the prices of goods and services.
FIRST DRAFT 5
The quantity theory of money also suggests that the amount of
money available in an
economy directly shapes the level of economic activities.
Therefore, when there are changes
in money supply, the economic activities in an economy change
too. The theory also assumes
that the changes in the supply of money primarily influence the
8. changes in spending. When
there is more money, people tend to spend more and vice versa.
The theory implies that the
value of money depends on the quantity of money available at a
particular time. As the price
goes up, people's spending power decreases.
Discussion
Based on the quantity theory of money, an increase in money
supply leads to an increase in
inflation. This happens because the value of money goes down,
and the economy fixes the
gap by increasing the price of goods and services to maintain
equilibrium. An increase in
money supply results from low-interest rates because many
people borrow money that
circulates within the economy. According to the theory, low-
interest rates attract low values,
which results in high prices for goods and services. On the
contrary, high-interest rates
increase the value of money, and smaller units have high
purchasing power, meaning the
prices will be low.
When the interest rates are lower, more people are willing to
9. borrow so that they can invest in
assets of their dreams, such as houses and cars. When the
interest is low on borrowed money,
there is more money to spend on making purchases. More
spending implies that the money
available is more than the goods and services (Borio &
Hoffman, 2017). At such times, the
supply of goods and services is lower than the demand, which
calls for an increase in prices.
When the interest rates are high, consumers have lower
disposable income, which lowers
their spending. When the spending is low, the money that
circulates in the economy is also
low because few people borrow money. A low supply of money
increases the marginal value
FIRST DRAFT 6
of money, and the purchasing power of a unit increases. When
the purchasing power goes up,
little money is required to buy goods and services, reducing
prices.
When the interest rates are high, banks give out few loans, and
this affects farmers and
10. business spending. These entities cut down their spending
through strategies such as reducing
the number of employees through layoffs. When employees lose
jobs, their disposable
income reduces, implying a reduction in their spending. When
consumers reduce their
spending. The demand for goods and services goes down.
Consequently, the supply of goods
and services is higher than what is demanded in the market. To
attain equilibrium, the prices
go down so that consumers purchase more and encourage
suppliers to continue producing
more.
A relevant example of the impact of interest rates on inflation is
what occurred in the USA
between 1980 and 1981. The Federal Reserve System increases
the interest rates from 14% to
19%, and this causes a severe recession. At this time, there was
little money to spend because
very few people could borrow loans. Although e changes caused
a recession, they put to end
the rising inflation that the country was experiencing. When the
government reduced the
interest rates in 2002, it contributed to the recovery of the
11. economy. In 2002, the Federal
Reserve reduced the interest rates to 1.25%, leading to more
borrowing and increased money
supply. Consequently, the consumers increased their spending,
and the economy started
booming again.
FIRST DRAFT 7
Inflation rate
Inflation
The graph above shows an inverse relationship between interest
rates and inflation. The
vertical line shows the interest rate, while the horizontal line
shows the inflation rates. The
arrow line shows the changes in inflation and interest rate. From
the above graph, it is clear
that when interest rates are at the maxim, the inflation rate is at
the minimum and vice versa.
Summary and Conclusion
Interest rates have an inverse relationship with inflation; when
the interest rates are high,
12. inflation reduces, and inflation arises when the interest rates are
low. When the interest rates
are high, many people borrow loans because they will pay less
and they will have a high
disposable income. Consumers' spending increases, which
creates a mismatch between
available goods and the quantity demanded. To attain
equilibrium, prices go up, implying
rising inflation. Low-interest rates also lower the marginal
value of money, which implies
Audra Sherwood
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Figure does not make sense - Please revise or omit from your
paper.
Audra Sherwood
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Usually there is a positive relationship between interest rates
and inflation.
FIRST DRAFT 8
that a lot of money is required to make a purchase. This directly
equates to high prices of
goods and services.
When the interest rates are high, few people borrow money,
leading to reduces circulation of
13. money in the economy. When the supply of money is low, its
marginal value increases,
meaning that little money can be used to make great purchases.
At this point, the prices of
goods and services are low. High-interest rates also imply that
consumers' spending power
reduces, causing a reduction in demand for goods and services
relative to supply. To attain
equilibrium, prices are reduced so that consumers can make
more purchases. Businesses may
also respond to high-interest rates by laying off some
employees, which further reduce
consumer spending, calling for a reduction in prices.
The Federal System should watch variables such as consumer
price index and producer price
index to maintain manageable inflation. When these indicators
rise more than a manageable
rate, the Federal system will increase the interest rate to
minimize spending and put prices
under control. When the indicators reduce so much, the system
should also reduce the interest
rates to control prices.
14. FIRST DRAFT 9
References
Ahiakpor, J. C. (2019). Macroeconomics Without the Errors of
Keynes: The Quantity Theory
of Money, Saving, and Policy. Routledge.
Borio, C. E., & Hofmann, B. (2017). Is monetary policy less
effective when interest rates are
persistently low?
Brown, S. (2020). Global inflation remains stubbornly low as
asset prices buck the trend-
interest rates. finweek, 2020(4), 25-25.
Geetha, C., Mohidin, R., Chandran, V. V., & Chong, V. (2011).
The relationship between
inflation Growth in Nigeria. The Empirical Economics Letters,
1100-1115.
Günel, T. Asymmetric Effects of Inflation Volatility on
Economic Growth in Turkey: New
Evidence Based on the NARDL Approach.
Kiley, M. T., & Roberts, J. M. (2017). Monetary policy in a
low-interest rate world.
Brookings Papers on Economic Activity, 2017(1), 317-396.
15. RT Ferreira, T., & Shousha, S. (2021). Supply of Sovereign
Safe Assets and Global Interest
Rates. International Finance Discussion Paper, (1315).
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References need to be APA formatted. Please refer to Purdue
Owl for further clarification.
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Statistics need to be strengthened throughout the body of your
paper.
Audra Sherwood
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Please re-organize your paper.
Audra Sherwood
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Overall, I would encourage you to keep up the hard work!
FIRST DRAFT 10
Running head: CASE 1
Case Study on Religious Discrimination and Racial Harassment
Alexia Biscoe
16. Wilmington University
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CASE 2
Case Study on Religious Discrimination and Racial Harassment
Identify and describe the specific issues Maalick encountered in
the workplace. Do the
actions of other workers at Treton represent discrimination and
harassment? What elements of
law are important for Treton to consider?
Maalick, formerly known as MarShawn DeMur, experienced
multiple instances of
discrimination and harassment based on his race and religion
while working in his new position.
After his weeklong spiritual trip, Maalick came back to find his
desk riddled with offensive
items. “When he entered his office, Maalick found it decorated
with dolls with pins sticking out
18. of various body parts, witch hats and containers of incense. On
the wall behind his desk was a
picture of Africa decorated with strange letterings and
symbols,” [ CITATION Com09 l 1033 ].
In addition, over the next few months Maalick continued to
receive offensive materials based on
his religion and race. This included a series of notes left on his
desk and car referencing black
cats, black magic, requests for palm readings and even notices
about the disappearance of
MarShawn DeMur. He also found several sheets of what
appeared to be chants with a title at the
top that read “Prayers for Black Folk” on his desk. Next to the
pages was a book titled Mystical
Practices from the Negro Experience.
These instances show harassment based on his religion and even
race based on the chants
and book left on his desk. I believe there is a clear indication of
harassment based on the
treatment Maalick has received according to Title VII of the
Civil Rights Act. According to Title
VII, “Harassment is unwelcome conduct that is based on race,
color, religion, sex (including
pregnancy), national origin, age (40 or older), disability or
19. genetic information. Harassment
becomes unlawful where 1) enduring the offensive conduct
becomes a condition of continued
employment, or 2) the conduct is severe or pervasive enough to
create a work environment that a
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CASE 3
reasonable person would consider intimidating, hostile, or
abusive. Anti-discrimination laws also
prohibit harassment against individuals in retaliation for filing a
discrimination charge, testifying,
or participating in any way in an investigation, proceeding, or
lawsuit under these laws; or
opposing employment practices that they reasonably believe
discriminate against individuals, in
violation of these laws,” [ CITATION Har l 1033 ]. Maalick
reported his concerns to Jenkins
expressing his clear displeasure of the acts as well as being
intimidated to not speak up at all for
21. fear he would be seen as a “troublemaker”. This is a clear
indication that Maalick was being
harassed at his place of employment.
The elements of law for Treton to consider would be their
liability as the employer when
an employee is experiencing harassment in the workplace.
According to the EEOC, “It is illegal
to harass a person because of his or her religion. Harassment
can include, for example, offensive
remarks about a person's religious beliefs or practices. Although
the law doesn't prohibit simple
teasing, offhand comments, or isolated incidents that aren't very
serious, harassment is illegal
when it is so frequent or severe that it creates a hostile or
offensive work environment or when it
results in an adverse employment decision (such as the victim
being fired or demoted). The
harasser can be the victim's supervisor, a supervisor in another
area, a co-worker, or someone
who is not an employee of the employer, such as a client or
customer,” [CITATION The l
1033 ]. When the employees teased, mocked, and otherwise
made the job miserable for Maalick,
22. and after Ford was made known of the issues, the company was
liable to act as defined by EEO
laws.
Evaluate the actions of the HR director, Marta Ford, in response
to Maalick’s situation.
What could she have done to prevent the situation and what
more could she do to ensure that this
type of situation would not occur in the future?
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24. being harassed. While her actions were adequate in order to stop
the situation after it had
occurred and prevented further harassment, there was much that
could have been done
proactively to avoid this situation to begin with. I believe Ford
should have spoken with
department heads to have a refresher course on their anti -
discrimination policies once Maalick
changed his name and first advised her he received comments
and questions regarding the
change.
In order to prevent further situations, I would recommend Ford
implement mandatory
diversity training courses to not only the department heads but
all of the employees as well.
While the email sent out reminding employees of the policies is
helpful, I would recommend a
training course that also requires each employee to sign an
agreement form that they understand
the rules and organization’s policies. This signed form can be
added to each employees file and
can serve as both a deterrent for future violations and an aid if
an employee should be caught
violating these policies.
25. How would you characterize Clive Jenkins’ behavior and
response to this situation?
I would characterize Clive Jenkins’ behavior as wildly
inappropriate. We are first made
aware of Jenkins’ religious views as he invited Maalick to his
church and made it a point to let
him know many employees were also members of his church.
There were multiple inappropriate
comments regarding Maalick’s religious views, including
calling them strange, referring to it as a
“so-called religion” and even stating “As an American with
African roots, you should have
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27. Jenkins’ actions were unethical in response to Maalick’s
complaints of the harassment. He did
not take the situation seriously and caused the work
environment to become tense and hostile.
The less he acted the more the employees harassed Maalick.
Jenkins’ also seemed to pass
Maalick over for a promotion and favored a church member.
Thus, causing Maalick to pursue the
filing of the discrimination/harassment complaint. As a
supervisor, this behavior is unacceptable
and should be reviewed for possible correction and/or
discipline.
What resolution to this situation might Judith Dixon suggest?
First, I would recommend all hiring for the position of systems
manager to be halted until
a proper investigation can be completed. If there was
discrimination, Dixon must act on multiple
levels. Maalick should be assessed to ensure he is qualified for
the position and if so, he should
be either offered that role or offered a transfer to a comparable
role at another facility (if that
would make him more comfortable). Then, Jenkins and Ford
should both be reviewed and
disciplined for their roles in this matter. Jenkins’ actions, as
28. well as inactions, proved that he was
at the very minimum, a liability to the organization. He put the
company at risk by not taking
Maalick’s concerns and acting appropriately as a supervisor.
Additionally, Ford made some
missteps as well and should be educated and possibly
disciplined. While being the HR director is
a busy job, she should have been knowledgeable enough to act
at the first communication from
Maalick that he was receiving questions and comments about
his religion and name change.
Investigating and identifying the harasser(s) also should have
been done in order to ensure those
individuals were aware of the policy and were disciplined as
necessary.
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30. organizational review might Dixon initiate or suggest from a
corporate perspective?
The broader implications of this situation could affect Treton as
a company. According to
the case, “Treton takes pride in its non-union status and strives
to develop policy and implement
programs that demonstrate its strong company culture of
employee development and
empowerment, procedural and operational integrity, and ethical
decision-making. To sustain its
culture and values, Treton has policies, procedures and
guidelines that articulate its expectations
of employee and employer behaviors. Promoting and facilitating
workforce diversity is a guiding
principle for Treton. The organization has written policies and
directives regarding workforce
diversity, equal employment opportunity/nondiscrimination and
workplace harassment,”
[ CITATION Com09 l 1033 ]. If word were to get out that
Treton had a documented or even
potential discrimination and harassment case, they could lose
their reputation, customers, and
trust from employees.
31. An informal organizational review should be conducted in order
to make sure Treton’s
equal employment opportunity policies are in order in each
department. In an informal review,
each department evaluates its organizational structure. This
should include Treton’s EEO policies
and procedures, how they are implemented, how information is
conveyed, and what the
repercussions are for violation of the policies. Once the review
has been completed, the results
should be issued to the HR department for feedback and
assistance in implementing any updates
needed, [ CITATION Bro19 l 1033 ].
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33. Resources: https://www.brown.edu/about/administration/human-
resources/organizational-
reviews
Combs, G. M. (2009). Religious Discrimination and Racial
Harassment: What Ever Happened
to MarShawn DeMur? Retrieved from Society for Human
Resource Management:
https://wilmu.blackboard.com/bbcswebdav/pid-13965741-dt-
content-rid-
74350889_1/courses/30949.201930/Student%20Workbook_Reli
gious_Racial_SW
%281%29.pdf
Equal Employment Opportunity Commission. (n.d.).
Harassment. Retrieved from
https://www.eeoc.gov/laws/types/harassment.cfm
The U.S. Equal Employment Opportunity Commissio n. (n.d.).
Religious Discrimination.
Retrieved from https://www.eeoc.gov/laws/types/religion.cfm
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Th
35. https://www.coursehero.com/file/45798995/Case-Study-on-
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http://www.tcpdf.org
FIRST DRAFT 10
Impact of Interest Rates on Inflation
First M. Last
Embry Riddle Aeronautical University
Professor First Last
Economics 211
21 November 2021
Introduction
Interest rates play a significant role in shaping a country's
economy. The Federal Reserve System in the US determines the
interest rates, which determine the prices of goods and services
in the market (Ferreira & Shousha, 2021). The two concepts are
linked, and academicians have established both direct and
inverse relationships between the two concepts. Some
academicians argue that since both inflation and interest rates
36. are driven by money, they have a direct relationship such that
an increase in interest rates increases the rate of inflation and
vice versa. However, the money quantity theory establishes an
inverse relationship between interest rates and inflation; High-
interest rates reduce money circulation, which leads to a
reduction in prices. On the other hand, low-interest rates
increase money circulation, which increases the price of goods
and services.
Literature Review
Definition of Inflation
Academicians define inflation differently. However, the most
harmonizing definition of inflation is the decline in a currency' s
value or purchasing power. The decline takes place over time
and affects the general price of goods and services in the
market. When there is inflation, a currency unit buys less than
what it used to but previously. For example, if the price of
bread increases from $ 1 to $ 1.50, it means the value of the
currency has reduced, and more money has to be used to buy
bread. When there is inflation, the money supply increases in
an economy faster than the production of goods and services
required in the market. This leads to an imbalance between
supply and demand in a country's economy.
Definition of Interest rate
Kiley & Roberts (2017) define interest rate as the amount a
lender charges a borrower, expressed as a percentage of the
principal. It is typically represented as an annual percentage,
and the borrower pays back the principal and the interest.
According to the International Monetary fund, interest rates
serves three functions;
It serves as a return on the financial asset so that it can promote
deferred consumption, a saving that will facilitate future
activities.
It is also considered a cost of capital that will determine the
amount of money that can be loaned to members of the public.
The interest rates within a country and the return rate of foreign
financial assets are normally evaded against inflation.
37. Based on these functions, it is clear that interest rates impact
the economy dramatically. It also affects other variables that
will influence investment activities that shape economic growth
and a country's development.
What is the relationship between inflation and Interest rate?
Different scholars establish the relationship between inflation
and interest rate differently. Gunel (2017) establishes a positive
relationship between inflation and interest rates based on the
Fischer hypothesis. He argues that both interest rate and
inflation are driven by money and affect demand and supply in
an economy.
Geetha et al. (2011) pose that based on the financial theory, the
inflation rate in an economy implies an increase in the price of
goods and services. When there is inflation, the value of money
goes down because a lot of money is chasing a few goods and
services available in the market. Geetha’s concept implies that
both inflation and interest rates are driven by money, and
inflation will lower the demand for money. Consequently, the
value at which the money was borrowed for reinjection into the
production of goods and services will reduce, hence creating a
positive relationship.
Although some academicians argue that there is a positive
relationship between interest rates and inflation, studies
indicate that the two variables are linked inversely; an increase
in interest rate reduces inflation while a reduction in interest
rate increases inflation. Research links interest rates to
economic variables such as purchasing power, consumer
spending, demand, and supply, determining market prices.
An increase in interest rate lowers purchasing power because
few people have access to loans. The high-interest rates
increase the value of money by increasing its purchasing power,
meaning the prices will be low. On the other hand, many people
can borrow loans (Brown, 2020). This increases the supply of
money in the economy and lowers the marginal value of money.
More money means more spending and more demand, which
calls for an increase in prices (inflation).
38. Theoretical Framework
The quantity theory of money suggests that the price of goods
and services in an economy is proportional to the money supply
in that economy. If the amount of money supplies increases,
then the price of goods and services also increases. For
example, when the money supply increases by 20%, goods and
services also increase by 20%. This implies that the consumer
will have to pay 205 more for goods and services compared to
what they paid before the price increase. When price increases,
it will result in rising inflation. The force that shapes supply
and demand for goods and services in an economy will affect
the supply and demand for money (Ahiakpor, 2019). When the
supply of money goes up, the marginal value of money reduces.
In other words, when the supply of money increases, the
purchasing value of a unit decreases if other factors are kept
constant. The economy adjusts to the decrease in value by
increasing the prices of goods and services.
The quantity theory of money also suggests that the amount of
money available in an economy directly shapes the level of
economic activities. Therefore, when there are changes in
money supply, the economic activities in an economy change
too. The theory also assumes that the changes in the supply of
money primarily influence the changes in spending. When there
is more money, people tend to spend more and vice versa. The
theory implies that the value of money depends on the quantity
of money available at a particular time. As the price goes up,
people's spending power decreases.
Discussion
Based on the quantity theory of money, an increase in money
supply leads to an increase in inflation. This happens because
the value of money goes down, and the economy fixes the gap
by increasing the price of goods and services to maintain
equilibrium. An increase in money supply results from low -
interest rates because many people borrow money that circulates
within the economy. According to the theory, low-interest rates
attract low values, which results in high prices for goods and
39. services. On the contrary, high-interest rates increase the value
of money, and smaller units have high purchasing power,
meaning the prices will be low.
When the interest rates are lower, more people are willing to
borrow so that they can invest in assets of their dreams, such as
houses and cars. When the interest is low on borrowed money,
there is more money to spend on making purchases. More
spending implies that the money available is more than the
goods and services (Borio & Hoffman, 2017). At such times, the
supply of goods and services is lower than the demand, which
calls for an increase in prices.
When the interest rates are high, consumers have lower
disposable income, which lowers their spending. When the
spending is low, the money that circulates in the economy is
also low because few people borrow money. A low supply of
money increases the marginal value of money, and the
purchasing power of a unit increases. When the purchasing
power goes up, little money is required to buy goods and
services, reducing prices.
When the interest rates are high, banks give out few loans, and
this affects farmers and business spending. These entities cut
down their spending through strategies such as reducing the
number of employees through layoffs. When employees lose
jobs, their disposable income reduces, implying a reduction in
their spending. When consumers reduce their spending. The
demand for goods and services goes down. Consequently, the
supply of goods and services is higher than what is demanded in
the market. To attain equilibrium, the prices go down so that
consumers purchase more and encourage suppliers to continue
producing more.
A relevant example of the impact of interest rates on inflation is
what occurred in the USA between 1980 and 1981. The Federal
Reserve System increases the interest rates from 14% to 19%,
and this causes a severe recession. At this time, there was little
money to spend because very few people could borrow loans.
Although e changes caused a recession, they put to end the
40. rising inflation that the country was experiencing. When the
government reduced the interest rates in 2002, it contributed to
the recovery of the economy. In 2002, the Federal Reserve
reduced the interest rates to 1.25%, leading to more borrowing
and increased money supply. Consequently, the consumers
increased their spending, and the economy started booming
again.
Inflation rate
Inflation
The graph above shows an inverse relationship between interest
rates and inflation. The vertical line shows the interest rate,
while the horizontal line shows the inflation rates. The arrow
line shows the changes in inflation and interest rate. From the
above graph, it is clear that when interest rates are at the
maxim, the inflation rate is at the minimum and vice versa.
Summary and Conclusion
Interest rates have an inverse relationship with inflation; when
the interest rates are high, inflation reduces, and inflation arises
when the interest rates are low. When the interest rates are high,
many people borrow loans because they will pay less and they
will have a high disposable income. Consumers' spending
increases, which creates a mismatch between available goods
and the quantity demanded. To attain equilibrium, prices go up,
41. implying rising inflation. Low-interest rates also lower the
marginal value of money, which implies that a lot of money is
required to make a purchase. This directly equates to high
prices of goods and services.
When the interest rates are high, few people borrow money,
leading to reduces circulation of money in the economy. When
the supply of money is low, its marginal value increases,
meaning that little money can be used to make great purchases.
At this point, the prices of goods and services are low. High-
interest rates also imply that consumers' spending power
reduces, causing a reduction in demand for goods and services
relative to supply. To attain equilibrium, prices are reduced so
that consumers can make more purchases. Businesses may also
respond to high-interest rates by laying off some employees,
which further reduce consumer spending, calling for a reduction
in prices.
The Federal System should watch variables such as consumer
price index and producer price index to maintain manageable
inflation. When these indicators rise more than a manageable
rate, the Federal system will increase the interest rate to
minimize spending and put prices under control. When the
indicators reduce so much, the system should also reduce the
interest rates to control prices.
References
Ahiakpor, J. C. (2019). Macroeconomics Without the Errors of
Keynes: The Quantity Theory of Money, Saving, and Policy.
Routledge.
Borio, C. E., & Hofmann, B. (2017). Is monetary policy less
effective when interest rates are persistently low?
42. Brown, S. (2020). Global inflation remains stubbornly low as
asset prices buck the trend-interest rates. finweek, 2020(4), 25-
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Geetha, C., Mohidin, R., Chandran, V. V., & Chong, V. (2011).
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Günel, T. Asymmetric Effects of Inflation Volatility on
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