Ehow Real Estate & Investment Commodities, Options & Derivatives Interest Rate Swaps How Do Interest Rates Affect the Economy? X How Do Interest Rates Affect the Economy?

The economy can be influenced easily by interest rates. When interest rates are high, people do not want to take loans out from the bank because it is more difficult to pay the loans back, and the number of purchases of cars and homes goes down. The opposite is also true.

The effects of a lower interest rate on the economy are very beneficial for the consumer. When interest rates are low, people are more likely to take loans out of the bank in order to pay for things like houses and cars. When the market for those things gets strong, price decreases and more people can purchases these things. This also bodes well for investors, who perceive less risk in taking out a loan and investing it in something because they would have to pay less back to the bank.

Read more: How Do Interest Rates Affect the Economy? | people do not have to spend as much money on bank payments, they have more disposable income to put toward things they want to purchase. Suddenly, a trip to the ice cream store is not so much of a budget crunch and a weekend at the spa seems more doable. These effects, although certainly not direct, are enough to stimulate the market when interest rates are low.

Low interest rates are not beneficial for lenders, who are seeing less of a return on their loan than in times when interest rates are high. This means that banks may find themselves having to lower the interest rates accrued on money deposited in the bank in order to maintain a steady profit. However, interest rates do not really have an effect on how much people save, because an increased amount of disposable income means that they are more likely to spend it than to save it.

When interest rates increase, though, foreign investment can increase because people outside of the country want a larger return for their investment and they are more likely to get it in a state of high interest...