What impact do changes in interest rates have on the economy?

How Changes in Interest Rates Impact the Economy

Interest rates play a significant role in shaping the overall economy. When the central bank adjusts interest rates, it has a ripple effect on various aspects of economic activity.

One primary impact of changes in interest rates is on borrowing and lending behavior. A decrease in interest rates makes borrowing cheaper, leading to increased consumer spending and business investment. This can stimulate economic growth and drive up demand for goods and services.

Conversely, when interest rates rise, borrowing becomes more expensive, which can dampen consumer spending and investments. This can slow down economic growth as businesses may reduce their expansion plans and consumers may cut back on big-ticket purchases.

Additionally, changes in interest rates can also influence exchange rates and capital flows, affecting international trade and investments. A country with higher interest rates may attract more foreign capital, strengthening its currency but potentially impacting its export competitiveness.

In conclusion, changes in interest rates have a profound impact on the economy, influencing spending, investment, inflation, and overall economic activity.

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