What is the significance of interest rates in an economy?

Interest rates serve a crucial role in the functioning of an economy by influencing multiple aspects of economic activity. When interest rates are low, borrowing costs decrease, making it easier for consumers and businesses to take loans for various purposes, such as purchasing homes or investing in new projects. This can stimulate economic growth due to increased spending and investment.

On the other hand, higher interest rates raise borrowing costs, which can lead to a reduction in consumer spending and business investments. As a result, higher rates can slow down economic growth and even lead to a contraction in some cases. Additionally, interest rates affect savings behavior; higher rates may encourage individuals to save more, while lower rates can incentivize spending as the returns on savings are reduced.

In this way, interest rates are a foundational economic variable that impacts borrowing, savings, investment, and consumer spending, making option B the most accurate statement regarding their significance in the economy.