My layman understanding: raising interest rates is supposed to slow down businesses from growing as fast. The way businesses often respond is by downsizing the workforce. So then you get inflation that’s still high + high unemployment: not a great recipe. Does anyone with a background in economics have more insight into this?
You've got it. Low interest rates spur the economy by letting companies borrow cheaply to expand their business. That's supposed to combat unemployment, but at a cost of high inflation, since there's more money. So, conversely, you can combat inflation by raising interest rates. But that's only one cause of inflation. If your economy is unproductive, or if the costs of your supplies go up, then prices will go up rega…
Raising interest rates is useful to lower inflation when inflation happens on the demand side of things no? By making money more "expensive" it reduces the money in general circulation.
Does it also work when the inflation comes from the supply side of things? Like, a war or natural tragedy that causes a certain commodity to spike in price due to low availability?