What is the connection between the price level and the interest rate?

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price level and interest rate are connected together in the sense that interest rates handling is one of the tools used by the central bank or the government to control prices in the economy. The central bank in the country uses interest rates as one of its main tools for rising or decreasing price levels, both on different effects. If the price level is too high, the central bank will raise interest rates. If the price level is too low, the central bank will reduce interest rates.

Interest raise increase affects the level of aggregated price in the economy by reducing consumers' ability to easily raise money from banks. The aim of central banks is usually trying to maintain interest rates in the most predetermined low percentage. When the market is too active and excessive demand for goods and services will start to push the prices of items that the central bank will try to limit the market activity. Price levels and interest rate are connected together by the fact that raising interestThe rates will cause the price of the goods.

Increase interest rates will not have the same easy access to different types of loans and loans that can be used to finance purchases such as cars, clothing, houses and other items. If consumers no longer have the means to pay for such things, demand for them will drop and prices will also fall. This connection between the price level and the interest rate means that the decline in demand caused by the increase in interest rates will lead to a situation where the supply is transported. Normally, if the supply is higher than demand, the prices of goods and services will fall in response.

Another relationship between price level and interest rate can be seen in a situation where deflation is not uncomfortable is lower than average. Such a situation is usually the result of too small demand from consumers for finished products on the market. In this situation, the central bank will reduce interest rates in a dreamFrom the consumer to get more money from banks and make more purchases. When the central bank reduces interest rates, other banks also respond by lowering interest rates on the savings account, so customers are less tempting to save money.