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What does GDP gross domestic product indicates if it is increasing or decreasing
What is the difference between democratically elected coalition government and democratically elected government
If bank rates are high thus it indicates inflation?
What is the difference between free market economy and emerging economy
If GDP is increasing, the economy is growing and getting richer.
A democratically elected government depends on an election result for its legitimacy. Sometimes a single party wins outright. Sometimes to get a government majority several parties have to agree to cooperate and act together. Then it is a coalition government.
Usually the bank rate is a result of a real return and inflation. High inflation will normally increase the bank rate.
A free market economy depends on private businesses, competition and market forces (contrast with a demand economy which is run by the government). An emerging economy usually describes a country which has been poor but which is now getting rich much faster. Emerging = developing. Usually emerging economies are free market economies.
sir aren’t bank base rate move opposite to inflation?
When inflation increase usually interest rate decreases and interest on saving accounts are effected if they are variable.
Borrowing also effected as credit rating. But if rate decrease due to inflation may result in decrease borrowing cost.
No. Usually interest rates increase with inflation because if you are going to be attracted to invest money in a bank, your deposit has to earn a real return and keep up with inflation. If you don’t keep up with inflation you have no incentive to defer expenditure.
Also, governments use interest rates as a way of controlling inflation (monetary policy). Higher interest rates make it more expensive to borrow so fewer people borrow and this dampens demand and inflation.
hi sir here is the link of investopedia they are explaining it inverse.
I am getting confused..please help
https://www.investopedia.com/ask/answers/12/inflation-interest-rate-relationship.asp
I further searched on google.
How does inflation affect real interest rates?
What Is the Fisher Effect? … The Fisher Effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. Therefore, real interest rates fall as inflation increases, unless nominal rates increase at the same rate as inflation.Aug 23, 2020I think our differences depend on which comes first – inflation or interest rates and it depends on which interest rates are the input and which the output.
Say that there were no inflation in the economy and that the real interest rate was 3% (the real interest rate is determined by worldwide demand for and supply of money). So if you are going to be persuaded to invest $100 in a bank account for a year you need the promise of $103 at the end of the year. If inflation were now 5% then you still need still 3% real return but also you need another 5% just to keep up with inflation. Overall the relationship is
I + Nominal rate = (1 + real rate )x(1 + inflation rate) = 1.03 x 1.05 = 1.0815
The nominal rate is 8.15%. If inflation rose to 10% the nominal rate would rise to 13.3%. Lenders will lend at 13.3% (and get a real return of 3%) and borrowers will borrow at 13.3% to pay for goods.
However, central banks (or Governments in some countries) can step in to try to control inflation. One way is to change the rate at which central banks (like the Bank of England or the Federal Reserve) will lend to other banks. So, lets say that the central bank in the last example above wanted to reduce the inflation rate of 10%. Instead of letting interest rates stay at 13.3%, the central bank raises interest rates to 20%. Investors would be delighted but now a borrower has to pay 20% for goods and this reduces demand for the goods and their price falls, ultimately reducing inflation. This relationship has been demonstrated many times and is used by Governments to control the economy.
Most of this is not very relevant to SBL. The most important element is:
I + Nominal rate (or money rate) = (1 + real rate )x(1 + inflation rate)
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