Question

Is it better for an economy to have relatively low interest rates to encourage more borrowings or is it better to have relatively high interest rates to encourage savings? Why?

Answer 1

Fixation of interest rates are always dependent upon the economic cycles and the demand and supply in the economy along with the money flow in the economy.

When there is a a deflationary cycle, the central banks will be trying to decrease the interest rate in order to stimulate the demand in the overall economy.

when there is an inflationary cycle, then the central banks of an economy will be trying to reduce the money flow into the economy by increasing the rate of interest.

It is better for an economy to have relatively stable interest rate in order to have adequate borrowing and flourishing of the economic demand and supply so it can be said that interest rate policy should not be highly fluctuating but it will always be adjusting to the economic needs and the economic cycle to help the economy Grow.