What is the purpose of increasing interest rates?

Answer 1

It slows down the economy.

Two ways:

It makes it more expensive to borrow; so investment and consumption both decrease.

It makes it more profitable to save; so you sacrifice current growth for future growth.

The reason WHY they try to slow down the economy is to keep inflation at bay.

Answer 2

Interest rate is the price of credit and as such is determined by the supply and demand for credit or loanable funds. It fluctuates becasue of demand and /or supply.

Interest rates rise when the demand curve for loanable funds shift. An example would be USA consumers want more loans (credit cards ) & so does China. Or supply changes: (Example) Britian changes policy to stop loaning to forieners. Behind demand and supply are the borrowing requirmentsof businesses, households, and governments, and the monetary policies of the Federal Reserve (example) in easy money a home buyer can buy the house with little or no down ---> after many banks face foreclosures, a bank will say, hey, I'll sell you a mortgage if you're serious and place 20% down on the loan.

Expectations also underlie the demand for and supply of loanable funds, especially expectations regarding inflation and expectations with respect to interst rates themselves. Expectations about interest rates often turn into self-fulfiling prophesises.

Interest rates tend to rise during periods of business cycle expansion, and fall during recessions. This reflects increased demand for loanable funds during explantions and decreased demand during recessions.

Answer 3

So the lenders can make more money.