Forex Indicators
how does increament in interest rates control inflation?
i just wanna know the movement in the forex markets affecting the local econmy
Public Comments
- If the government is trying to control the economy by using interest rates, what they're usually doing is similar to what the Federal Reserve does in the US. They adjust only the rate used by member banks to borrow from the Fed, and all other interest rates tend to follow. When a bank borrows money from the Fed, the fed simply creates electronic money, and by doing so, they are creating money. The creation of money has the same effect on the economy as printing money--the more you print, the less the money is worth. When the interest rate goes up or down, it affects the volume of borrowing by member banks, so if banks borrow more, more electronic money is created, money is worth a little less. If they borrow less money, currency is worth a little more. As soon as the money enters the banking system, though, it has a multiplier effect. $1 in a bank vault is worth about $5 in the economy, for instance. That's because the bank loans the money out, a consumer borrows it and uses it to pay another consumer, who uses the dollar for something else, etc. So the same dollar will end up on the books of 4 or 5 people at the same time, and so creating one dollar has the effect of actually creating five.
