How do changes in interest rates affect business cycles?

Changes in interest rates can have a significant impact on business cycles. Interest rates are determined by the central bank and influence borrowing costs for businesses and individuals. When interest rates are lowered, it becomes cheaper for businesses to borrow money for investment purposes. This stimulates economic activity, as businesses are more likely to expand their operations, invest in new projects, and hire more workers. Increased investment and consumption lead to higher aggregate demand, which can result in economic growth and expansionary phases of the business cycle.

Conversely, when interest rates are raised, borrowing costs for businesses increase. This can discourage investment and consumption, as businesses may be less willing to take on additional debt and individuals may be less inclined to make large purchases. Reduced investment and consumption can lead to a decrease in aggregate demand, resulting in economic contraction and recessionary phases of the business cycle.

Furthermore, changes in interest rates can also affect financial markets and investor behavior. Lower interest rates can make stocks and other investments more attractive, leading to increased demand and potentially driving up asset prices. On the other hand, higher interest rates can make fixed-income investments, such as bonds, more appealing, potentially leading to a decrease in stock prices.

Overall, changes in interest rates play a crucial role in shaping business cycles by influencing borrowing costs, investment decisions, consumer behavior, and financial market dynamics.