How do interest rates affect borrowing?

Interest rates play a crucial role in determining the cost of borrowing money. When interest rates rise, the cost of borrowing also increases. This is because lenders charge higher interest rates to compensate for the increased risk of lending during times of higher rates. Consequently, borrowers face larger interest payments on the money they borrow, which can lead to a reduction in overall borrowing demand.

Conversely, when interest rates are lower, borrowing becomes cheaper, as lenders offer loans with reduced interest payments. This often encourages individuals and businesses to take on more debt, thereby stimulating economic activity.

The other options presented misinterpret the relationship between interest rates and borrowing costs. While the statement regarding fixed interest rates fails to capture the variability based on creditworthiness and market conditions, the emphasis on higher rates leading to cheaper borrowing is fundamentally contrary to how interest rates function in economic terms.