How does high interest rate affects price rise?
Answer:
The central bank raises short-term interest rates in order to cool off the economy and lower the inflation rate. The general idea is that higher interest rates raise borrowing costs, which in turn lower the demand for goods and services by firms and businesses. Lower demand leads to slower growth and lower inflation.
this is fairly easy.
You own a company -
It costs you $3.00 to make a part, which you sell for $4.50 to pay the bills and make a profit.
Now, your supplies cost you more when you buy them - so you need a loan to help get cover those increases.
So you costs that were $3.00 are now $4.00. - in straight line you would think that you would need to raise your selling price to $6.00 to cover all your straight line costs - BUT that would not factor in your increased costs due to interest, etc.
See Interest is only a refection of how the value of a dollar decreases -
Interest and Inflation are twins.
As interest increases (the costs of borrowing money) - then the costs associated with the good increases to cover those interest increases.
There is something called monetary inflation. Governments use high interest rates to prevent this inflation. High interest rates would deter business and private individuals from borrowing from banks and would encourage persons to save more rather than spend. Hence it will take some of the money out of circulation.
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