How do interest rates typically affect investment spending?

Interest rates play a significant role in influencing investment spending within an economy. When interest rates are lower, the cost of borrowing decreases, making it more attractive for businesses to take out loans for investment projects such as purchasing new equipment, expanding operations, or undertaking research and development. This incentivizes firms to invest more as they can finance their activities at a lower cost.

Additionally, lower interest rates can lead to increased consumer spending, which can also promote business investment, as firms anticipate higher demand for their products and services. Consequently, a favorable economic environment unfolds, encouraging companies to commit to long-term investments in anticipation of future returns.

In contrast, higher interest rates typically raise the cost of borrowing, which can cause businesses to postpone or reduce their investment plans. Therefore, the relationship between interest rates and investment spending is primarily characterized by how lower rates stimulate greater investment activity.