Interest rates are really important for the economy. They affect how much people spend and how much businesses invest, which is called aggregate demand. Let’s break this down into simpler parts:

1. Consumer Spending:

   • When interest rates are low, borrowing money gets cheaper. For example, if you want to buy a car or a house, low interest rates make loans more affordable. Because of this, you might be more likely to take out a loan. This helps increase consumer spending and boosts aggregate demand.
   • But when interest rates go up, borrowing becomes more expensive. This can make people think twice about making big purchases, like buying a home or a new car.

2. Business Investment:

   • Low interest rates also make it easier for businesses to borrow money to grow or start new projects. For example, if a business can get a loan with a low interest rate, it might decide to build a new factory. This kind of investment not only increases aggregate demand but also helps the economy grow in the long run by creating jobs.
   • On the other hand, if interest rates are high, businesses might hold back on spending. With higher costs, they may choose to do fewer projects, which can slow down economic growth.

3. Understanding Aggregate Demand:

   • You can see how this all works with something called the Aggregate Demand curve. When interest rates drop, the curve shifts to the right. This means there’s more aggregate demand and possibly more economic growth.
   • If interest rates rise, the curve shifts to the left, showing that demand is lower, which could slow the economy down.

In short, changes in interest rates have a big impact on how much people spend and how much businesses invest. This makes interest rates a key factor in helping manage economic growth and stability.