What happens to interest rates during periods of inflation?

Question

economics

Answer 1

Depends on monetary and/or fiscal policy.

If gov tries to stimulate economy (fiscal policy/ stimulus checks/tax-cuts, etc) rather to stop inflation then nominal interest rates may rise (but real interest rates may remain the same)

If FED pursues easy-money monetary policy then inflationary expectations may rise thus nominal interest rates may rise (but real interest rates may remain the same)

If main goals for both Gov or FED is to fight inflation then nominal interest rates may fall (if inflation falls)

If there is higher risks in economy then interest rates may increase.

If there is lack of free money in economy (liquidity crisis) then interest rates may rise too.

Answer 2

For non-economics majors, it is advisable to define INFLATION first. Take note that inflation is not just the increase in price. It is the DEVALUATION of your money that is why you cannot buy as much.

Inflation is normal as long as it is within permissible rates. It can occur as a sign of economic growth or instability.

Inflation because of instability is more common. Interest rates in this case tend to increase. Basically because the government would adjust policies to DECREASE money supply. Why? because a decrease in money supply regulates inflation in the sense that it gives more value to your money since you only have enough. Just like how diamonds are expensive because they are rare.

This measure would, in turn, regulate the level of inflation.