Business cycles play a big role in how inflation and interest rates change over time. Let’s break it down into two main parts:

1. When the Economy is Growing (Expansion):

   • When the economy grows, people buy more things.
   • Because of this higher demand, businesses often raise their prices. This increases inflation.
   • To keep prices in check, central banks may raise interest rates.

2. When the Economy is Shrinking (Contraction):

   • When demand goes down, prices can drop too, and sometimes this leads to deflation (when prices fall).
   • In this case, central banks lower interest rates. They do this to encourage people to borrow money and spend more.

So, it’s all a cycle! When there’s more activity, prices and interest rates usually go up. But when there’s less activity, inflation and interest rates often go down.

Understanding these ups and downs helps us see how everything in the economy is connected!