University of Central Florida (UCF) ECO2013 Principles of Macroeconomics Practice Exam 1

Lower interest rates typically encourage higher consumer and business borrowing due to several interconnected reasons. When interest rates decrease, the cost of borrowing funds becomes cheaper for both consumers and businesses. This means that loans for purchases, such as homes or cars, become more affordable for consumers, leading to increased spending. Similarly, businesses find it less expensive to finance new projects, expand operations, or invest in new equipment and inventory, which can stimulate growth and innovation.

As consumers and businesses take on more loans, it boosts overall demand in the economy. Increased consumer spending contributes to economic growth, while heightened business investment can lead to job creation and further expansion. In essence, lower interest rates serve as a catalyst for economic activity, enabling more investments and expenditures that can result in a virtuous cycle of growth.