00:01
This problem asks us to analyze a quote about the australian dollar falling in value after inflation was less than expected, which caused the central bank to be less likely to raise interest rates.
00:14
All right.
00:16
So the first part of this question is trying to understand why a lower inflation rate than expected would make the central bank less likely to raise interest rates.
00:26
So why would a central bank raise interest rates? so why raise r? we'll call that the interest rate.
00:35
So why would you raise it? you'd want to raise it to curb borrowing, right? because when r is higher, the interest rate is higher, that means you have to pay back loans that you would take out on higher interest, right? and you're also, so you're going to curb borrowing and you want to encourage saving, which will fund more investment.
00:58
Right.
00:58
So when you raise the interest rate, you're going to get a better return on your saving, and then there'll be more funds available to be borrowed and loaned out for investment.
01:09
So you would want to raise the interest rate if you want to slow down the economy right now.
01:13
You want less people borrowing and spending money right now, and you want to encourage them to save that money for slow growth later with investment.
01:22
So if the inflation rate is lower than expected, that means inflation is less of a concern than we thought.
01:30
So economy isn't as hot as we thought.
01:37
Right? so the economy isn't running away from us if we think, if we find out that inflation is lower than expected.
01:43
So we don't really need to curb borrowing or encourage saving...