A student researching economics has taken notes:
• Inflation occurs when prices rise across an economy • Central banks adjust interest rates to influence inflation • Higher rates make borrowing more expensive • Lower rates encourage spending and investment • Stable, moderate inflation is generally considered healthy
The student wants to explain how central banks control inflation.
Inflation occurs when prices rise across an economy.
Central banks control inflation by adjusting interest rates—raising rates makes borrowing expensive and cools spending, while lowering rates stimulates economic activity.
Stable, moderate inflation is generally considered healthy for an economy.
Lower interest rates encourage consumer spending and business investment.
Correct Answer: B
Choice B. Raising/lowering rates affecting borrowing and spending explains control mechanism.