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How do interest rates influence economic growth?
Interest rates directly affect borrowing costs for consumers and businesses. When rates are low, borrowing becomes cheaper, encouraging spending and investment, which can stimulate economic growth. Conversely, high interest rates can slow down economic activity as loans become more expensive.
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What happens when interest rates are held steady?
Holding interest rates steady can provide stability in the economy. It allows businesses and consumers to plan their finances without the uncertainty of fluctuating rates. However, if inflation remains a concern, steady rates may not be enough to control rising prices.
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How do changes in interest rates affect employment?
Changes in interest rates can significantly impact employment levels. Lower rates can lead to increased hiring as businesses expand due to cheaper financing. On the other hand, higher rates may lead to layoffs or hiring freezes as companies cut back on spending.
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What are the long-term effects of maintaining high interest rates?
Maintaining high interest rates can lead to reduced consumer spending and business investment, potentially slowing economic growth over time. While it may help control inflation in the short term, prolonged high rates can lead to higher unemployment and a stagnant economy.
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Why did the Bank of England hold interest rates at 5%?
The Bank of England decided to hold interest rates at 5% due to ongoing inflation concerns, particularly in the services sector. This cautious approach follows a previous rate cut and reflects the need to balance economic growth with inflation control.
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What is the relationship between interest rates and inflation?
Interest rates and inflation are closely linked. When interest rates are low, spending increases, which can lead to higher demand and, consequently, inflation. Conversely, higher interest rates can help reduce inflation by discouraging spending and borrowing.