Low interest rates can incentivize businesses to invest and grow, potentially leading to job creation. Imagine a business owner who sees low borrowing costs as an opportunity to expand, hiring new workers in the process.
The equation isn't quite that simple. While low rates might stimulate borrowing, they can also fuel inflation. Imagine a scenario where everyone has easy access to cheap credit, leading to a surge in spending and eventually, rising prices. Central banks raise interest rates to combat inflation, but this can dampen economic growth. It's a delicate balancing act.
Businesses might choose to park their money in savings accounts if interest rates rise significantly. The potential for a return on investment becomes more attractive than the risks of expansion. This shift in behavior could lead to a slowdown in economic activity.
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