How does increasing interest rates counter inflation?

And doesn't it make borrowing for businesses more expensive?

Answers

ChuckF answered a question in Economics.
283 points

ChuckF answered one year ago …

That's exactly how it counters inflation...if it makes borrowing more difficult for businesses, this way they won't be able to ramp up and expand rapidly, thus reducing the demand for much of the raw goods they buy which in turn reduces the price. The same applies to the consumer space - the less cash people have, the less they'll buy and prices will inevitably come down.

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