Imagine you're selling lemonade. If the price of lemons goes up, your lemonade costs more, that's like inflation. Now imagine you borrow money from a friend to buy lemons. Your friend says, 'I'm going to charge you a little more for borrowing my money because prices are going up.' That extra cost is like an interest rate. When prices go up (inflation), people often raise the price of borrowed money (interest rates) too.
Examples
- A bakery raises prices because flour costs more, that's inflation. The bank says it will charge a little more for loans now, that's like an interest rate increase.
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See also
- Why Do We Have Different Kinds of Taxes?
- Why Do Prices Change So Much?
- Why Do We Use Money Instead of Bartering?
- Why Do Prices Go Up So Much When There's a Shortage?
- Why Do We Have Different Kinds of Coins?
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Categories: Economics · inflation,interest rates,economy,central bank,money