Explain the concept of interest rates and their role as an economic indicator.

Interest rates refer to the cost of borrowing money or the return on investment for lending money. They play a crucial role as an economic indicator because they have a significant impact on various aspects of the economy.

Firstly, interest rates affect consumer spending and investment decisions. When interest rates are low, borrowing becomes cheaper, encouraging individuals and businesses to take loans for purchasing goods, homes, or making investments. This increased spending and investment stimulate economic growth. Conversely, high interest rates make borrowing more expensive, discouraging spending and investment, which can slow down economic activity.

Secondly, interest rates influence inflation. When interest rates are low, borrowing becomes more affordable, leading to increased spending and demand for goods and services. This increased demand can potentially lead to higher prices, contributing to inflation. On the other hand, high interest rates can reduce spending and demand, which can help control inflation.

Thirdly, interest rates impact exchange rates and international trade. When a country's interest rates are higher than those of other countries, it attracts foreign investors seeking higher returns. This increased demand for the country's currency can strengthen its exchange rate. Conversely, lower interest rates can discourage foreign investment, leading to a weaker currency. Exchange rate fluctuations can affect a country's exports and imports, influencing its trade balance.

Overall, interest rates serve as an economic indicator because they reflect the cost of borrowing and the return on investment, influencing consumer spending, investment decisions, inflation, and exchange rates. Monitoring and analyzing interest rates provide valuable insights into the state of the economy and help policymakers make informed decisions.