How do low interest rates typically influence economic activity?

Low interest rates typically encourage borrowing and spending because when the cost of borrowing money is low, consumers and businesses are more inclined to take out loans. This is because the monthly payments on loans are reduced, making financing purchases like homes, cars, or business expansions more affordable. When consumers and businesses borrow more, they tend to increase their spending, which stimulates economic growth.

Low interest rates also mean that banks can charge lower rates on loans, which makes it easier for individuals to finance big-ticket items and for businesses to invest in new projects or expansions. This heightened level of borrowing and spending can lead to increased demand for goods and services, prompting businesses to ramp up production, hire more workers, and further boost economic activity.

In contrast, higher interest rates would discourage borrowing and spending, possibly leading to slower economic growth or even contraction. Therefore, low interest rates play a crucial role in stimulating economic activity by making it cheaper and easier to borrow money.