What does an increase in interest rates typically lead to in the economy?

An increase in interest rates typically leads to decreased borrowing by consumers. When interest rates rise, the cost of borrowing money increases, which makes loans for things such as homes, cars, and personal expenses more expensive. As a result, consumers are less likely to take out loans or may choose to limit their borrowing. This decreased consumer borrowing can lead to a slowdown in economic activity since consumers may cut back on significant purchases, directly impacting overall demand in the economy.

In this scenario, while increased consumer spending, higher investment by businesses, and lower levels of savings might be considered in different contexts, they do not align with the typical response to rising interest rates. Higher interest rates tend to deter spending and investment as financing becomes costlier, resulting in a contraction of these economic activities rather than their expansion.