WISE Economics and Personal Finance Practice Test

High interest rates increase the cost of borrowing because they represent the price that borrowers must pay to access funds. When interest rates are elevated, lenders require borrowers to pay back not only the principal amount of the loan but also a higher amount in interest. This can lead to increased monthly payments for those taking out loans, which may discourage individuals and businesses from borrowing.

As borrowing becomes more expensive, consumers might decide against taking out loans for big purchases such as homes, cars, or education. Similarly, businesses may postpone or cancel plans for expansion due to the heightened cost of financing. Therefore, high interest rates generally lead to a decrease in demand for loans, as fewer people and companies are willing to borrow under these conditions, ultimately constraining economic growth.