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The level of investment in the economy is sensitive to changes in the prevailing interest rate. In general, if interest rates are high, the investment decreases. On the contrary, if interest rates are low, the investment increases. This inverse correlation is key to understanding the relationship between the interest rate and investment.
Individuals, companies and governments demand money, or in reality, they need money. Demand for money is used to finance deficits, cars or education.
Low interest rates
Investing in education, infrastructure or commercial expansion is an activity that needs money to carry out. If interest rates are low, students, governments and businesses can borrow the money they need cheaper.
High interest rates
When interest rates are high, the investment becomes more expensive. As money becomes more expensive to borrow, companies, governments and individuals begin to delay their investment plans.
The Federal Reserve
The Federal Reserve also affects interest rates with its monetary policy. The purpose of monetary policy is to control economic conditions in the US. influencing interest rates.
Economic conditions may influence investor expectations. In a strong economy, those who borrow money expect good conditions to continue so they can have the convenience of borrowing more money, potentially raising interest rates. However, during conditions of weak economies, the opposite is true.