In what way do interest rates influence GDP?

Interest rates play a significant role in influencing GDP primarily through their effect on consumer and business spending. When interest rates are low, borrowing costs decrease, making it cheaper for consumers to take out loans for big purchases such as homes and cars. This increase in consumer spending can lead to higher demand for goods and services, which in turn can boost economic growth and, consequently, GDP.

Additionally, lower interest rates encourage businesses to borrow money for investment in capital projects, such as expanding operations or purchasing new equipment. Increased business investment generally results in enhanced productivity and job creation, further contributing to economic growth.

Conversely, when interest rates rise, borrowing becomes more expensive, which can suppress both consumer and business spending. This relationship illustrates how changes in interest rates have a significant and direct impact on overall economic activity and GDP.