Interest rates have a similar effect to inflation and recession. If interest rates are increased by the Bank of England then spending is likely to fall. This is because repayments on loans are increased which results in less disposable income. This is because of a decrease in consumer confidence. They realise that they must save their money for the essentials rather than spend what they have on luxury items. Many people have a loan in the form of a mortgage, which therefore means the vast majority of people are affected by interest rates in this way. Increased interest rates may stop business spending because it could be more beneficial for the business to gain interest on their capital through saving, as this could be larger than sales from a new product which they would invest their money in. Decreased interest rates have the opposite effect because consumer confidence will be high, resulting in a higher disposable income and this increases profit for business. This can help reduce unemployment because the multiplier effect is caused. This is caused by an increase in demand because of a larger disposable income; therefore supply needs to increase so more workers are required. This then circles round again by the former unemployed having a disposable income therefore increasing supply and demand further.
Exchange rates have become a vital part of the economy because of globalisation. This has seen an increase in worldwide trade