How do interest rates generally affect consumer spending?

Interest rates play a significant role in influencing consumer spending patterns. When interest rates are higher, borrowing costs increase. This discourages consumers from taking out loans for major purchases such as homes, cars, or big-ticket items because they would have to pay more in interest over time. Consequently, as borrowing becomes more expensive, consumers tend to cut back on spending, leading to a decrease in overall consumption.

On the other hand, lower interest rates reduce the cost of borrowing. This encourages consumers to take on loans since they can do so at a lower cost, effectively enhancing their purchasing power. Lower interest rates often stimulate spending because consumers feel more confident in financing new purchases and taking on additional debt.

Therefore, both of these dynamics illustrate how interest rates generally affect consumer spending: higher rates tend to decrease spending, while lower rates tend to increase it. This dual relationship is why the assertion that both higher interest rates decrease spending and lower interest rates increase spending is correct.