How do interest rates impact the economy?

Interest rates play a critical role in influencing borrowing and spending levels within an economy. When interest rates are low, borrowing becomes cheaper, encouraging individuals and businesses to take out loans for purchases like homes, cars, or business expansions. This increase in borrowing typically leads to higher levels of spending, which can stimulate economic growth.

Conversely, when interest rates are high, borrowing becomes more expensive. This situation tends to discourage individuals and businesses from taking on new debt, leading to reduced spending. The effects can result in slower economic growth or even contraction if the reduction in spending is significant.

This influence on the behavior of consumers and businesses demonstrates how closely interest rates are tied to overall economic activity. They impact not just the availability of credit but also broader economic outcomes, such as employment levels and investment rates. Understanding this relationship is key for policymakers who manage economic policies and respond to economic conditions.