The Effect of Interest on the Economy
Just as with your personal finances, interest rates have a huge effect on the economy and it’s stability. They have a controlling effect on the economy. Whether they are rising or falling, high or low these factors have major impact on the economy.
Consumer spending is accountable for about two thirds of our economy and when rates are low people are more willing to borrow money. This in turn increases spending and boosts the economy. You’ll also see businesses growing and hiring more employees. More jobs mean more money to be spent and put back into the economy. However, if the economy gets going too fast there can be a problem with the demand for goods being higher than the amount of goods available. This will lead to those goods costing more money then before due to the expense of rapidly producing those goods or even the company’s ability to make a higher profit off of a product they know the consumer is going to buy regardless of price. This is called inflation and this can have a negative effect on the economy. (For more information on inflation see the article “The Effects of Inflation on Your Money”)
In response to inflation the government will raise interest rates making it more expensive to borrow and slowing down consumer spending. There is some danger to this as you can see with the economic situation we are currently experiencing. If the government raises the interest too high or too fast it brings the economy into a recession. For a recession to be declared there must be two consecutive quarters of negative growth in the country’s Gross Domestic Product, which is the total market value of goods and services produced by workers and capital.
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