1)What effect does inflation have on interest rates and why?

2)Let the MPC = 0.5 in an economy. These households are:

A) saving a relatively low amount

B) saving a relatively high amount

C) importing a lot of goods

D) overly taxed

1)

Inflation and interest rates are inversely related. All other things being equal, high inflation correlates to lower interest rates and low inflation correlates to higher interest rates.

Central banks typically set and use the interest rates in response to inflationary pressures. If inflation rises too high, it is typical for banks to increase interest rates in order to lessen overall spending and decrease inflation. Conversely, if inflation is low enough to create a stagnant market, then decreasing interest rates will increase consumption and boost inflation in response.

2)

Answer: B

People can only do one of two things with their disposable income. They can either save the money or spend it on consumption. Saving the money leads to more consumption in the future. Most people spend the large majority of their disposable income on consumption spending. An MPC of 0.5 means people are only spending half their money on consumption and saving the rest. This means that an economy with an MPC of 0.5 is saving a relatively high amount.