How do interest rates affect the economy?

Interest rates can have a significant impact on the economy in several ways. When interest rates are high, it becomes more expensive for businesses and individuals to borrow money, which can reduce spending and slow down economic growth. Conversely, lower interest rates can stimulate borrowing and spending, which can boost economic activity.

Lower interest rates can also make it more attractive for businesses to invest in new projects or expand their operations, which can create jobs and increase production. Additionally, low interest rates can make it easier for consumers to purchase homes or other big-ticket items, which can also stimulate economic activity.

On the other hand, higher interest rates can attract foreign investment, which can strengthen a country’s currency and improve its balance of payments. However, this can also lead to higher inflation if demand for goods and services outstrips supply, leading to higher prices.

Overall, interest rates are an important tool that policymakers use to manage the economy, and their impact can be far-reaching and long-lasting.

Learning financial topics and understand how it actually impacts you personally can be daunting, but our mobile app makes it easier to understand a variety of effects such as interest rates, inflation and taxation on your long-term savings.

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