is AAT wrong on this practice question or am i (images included), Cash Managment

topcat

Hi all if any would could help that would be great , (im guessing I have overlook something here)

My answer :



AAT model Answer:




Based my answer on Kaplan book "When interest rates are low money is less expensive to borrow so people will spend more. It will also create inflation this can make it harder for some people to pay for goods as prices will rise"

coojee

topcat wrote: »

Hi all if any would could help that would be great , (im guessing I have overlook something here)

My answer :



AAT model Answer:




Based my answer on Kaplan book "When interest rates are low money is less expensive to borrow so people will spend more. It will also create inflation this can make it harder for some people to pay for goods as prices will rise"

If low interest rates lead to inflation then when there is already high inflation interest rates must rise to try and bring inflation back down again. If interest rates get lower then people will continue to spend which will further drive up inflation. Inflation is caused in part by demand being greater than supply (ie people want to buy more than is available) this drives up prices thereby increasing inflation. To lower inflation then, either supply needs to increase or demand needs to decrease. The B of E can't do anything about supply but they can try and alter demand by increasing interest rates to give people less money to spend. It does sometimes seem counter intuitive I know.

crispy

Hello,

In time when interest rates are low this is likely to encourage people to borrow and spend, however this can cause the value of the £ to decrease (inflation). One of triggers a government will use in time of high inflation is to rise interest rates rates depressing the amount of borrowing/spending.

Linky:
http://money.howstuffworks.com/interest-rate4.htm

topcat

thank you both the light bulb has finally turned on after reading both of your posts :001_smile: