Explain how interest rates could be used to stimulate a rise in inflation.

Interest rates, which represent the cost of borrowing money and the returns from saving it, are used by central banks to control the level of inflation. If the central bank wants to increase inflation, it will need to stimulate an increase in aggregate demand. Lowering interest rates will make the cost of buying on credit cheaper for consumers and firms, and will make borrowing for investment cheaper as well. Consequently, consumption and investment will increase. Consumption and investment are two of the largest components of aggregate demand, so, aggregate demand will also increase (represented by the AD curve shifting right). An increase in aggregate demand means that the economy is moving closer to full capacity, wages and prices will start to increase when this happens as firms compete for workers by raising wages, and workers demand more and more goods from the firms in the economy as they are now earning more. As a result of rising prices, inflation will rise.