What is the relationship between interest rates and consumer spending?

The relationship between interest rates and consumer spending is largely driven by the cost of borrowing and the returns on savings. When interest rates are high, the cost of borrowing increases. This means that loans for homes, cars, and other goods become more expensive, leading consumers to be more cautious about taking on new debt. As a result, higher interest rates deter consumer borrowing and spending, often resulting in a decrease in overall consumer expenditure.

Additionally, high interest rates can also negatively impact existing debt obligations. Consumers with adjustable-rate loans may see their monthly payments rise with increasing rates, which further reduces their disposable income for spending. Hence, as the cost of borrowing rises and the burden of existing debt increases, consumer spending tends to decrease.

In contrast, lower interest rates reduce the cost of borrowing and make credit more accessible, which generally encourages consumers to spend more. By understanding this dynamic, it becomes clear that the correct answer reflects how higher interest rates correlate with reduced consumer spending due to increased borrowing costs and financial strain on consumers.