Inflation (Inflation): is the rise in the general level of prices of goods and services, inflation is considered the biggest economic problem facing the central banks in the world, has always sought to control it and reduce the severity.
The central banks put a target rates of inflation, if inflation increased or decreased for target rates the central bank intervenes through interest rates.
● How the central bank uses interest rates to control inflation?
When high inflation the central bank to raise interest rates, because the existence of inflation means higher quantity supplied of money, and raising interest rates increases the cost of borrowing money, are raising interest rates and less money supply gradually subside inflationary pressures, and as a result of higher interest rates rise the value of currency As mentioned above, and also with high inflation speculation investors begin to raise interest rates and the high exchange rate, they start buying the currency.
Deflation (Deflation) is a low rate of inflation below zero, and is also known as inflation negative, deflation is not a positive phenomenon is leading to a decline in prices of goods and services, which in turn leads to the collapse of corporate profits and bankruptcy and other negative economic effects, so the central banks are cutting rates Interest in the event of deflation, and as a result reduced the value of the currency.
● How do you measure inflation?
There are more than one indicator to measure inflation, and can review the section on economic indicators on the following link "economic indicators."
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