Answer to Question #208843 in Macroeconomics for geoffrey

Question

1.    The government decides to reduce the interest rates in a bid to boost economic growth through investment. Analysts have argued against this policy citing inflation.

a)    What type of Inflation is this likely to cause. (Justify your reasoning)

Answer 1

Demand-Pull Inflation.

The reduction in interest rate will create demand-pull inflation because borrowings for the consumers and businesses will become cheaper. Therefore, too much money will chase few goods will create demand-pull inflation. In this case, more pressure is being put on the existing factor of productions thus more pressure on the factor of production will increase their prices and leads to demand-pull inflation.