How do interest rates influence borrowing and spending?

Interest rates are like the price you pay to borrow something from someone else.

Imagine you want a new toy, but you don’t have enough coins. You can ask your friend for some money now, and promise to give them more later, that’s borrowing. The extra coins you give them later are called interest, and the price of that extra coin is the interest rate.

If the price of borrowing (the interest rate) goes up, it means you’ll have to give your friend more coins later. That makes borrowing feel like a bigger deal, maybe you decide to wait until you save up enough coins yourself instead. So higher interest rates can make people borrow less and spend less too.

If the price of borrowing goes down, it’s easier to get that toy now. You only have to give your friend a few more coins later, not many! That means you might be more likely to borrow and buy things right away. So lower interest rates can make people borrow more and spend more too.

It's like the toy shop has different prices depending on how much you're willing to pay extra later.