How do interest rates influence consumer behavior?

Interest rates play a crucial role in influencing consumer behavior, particularly in terms of spending and saving. When interest rates are higher, the cost of borrowing money increases. This often leads consumers to reconsider or delay taking out loans for large purchases, such as homes or cars, given that higher interest payments can make these loans less affordable. As a result, people may choose to spend less, leading to a reduction in overall consumer spending.

At the same time, higher interest rates make saving more attractive because individuals can earn more on their deposits. This potential for higher returns encourages consumers to save rather than spend their money. When consumers decide to put their money into savings accounts or other interest-bearing investments instead of making purchases, it reflects a behavior shift towards saving over spending.

In summary, higher interest rates generally lead to an increase in saving and a decrease in spending, which is why this response accurately captures the relationship between interest rates and consumer behavior.