Final answer:
High interest rates increase the cost of borrowing, which deters both businesses and individuals from taking out loans, thereby reducing consumption and investment spending. Conversely, an increase in available loanable funds typically results in lower interest rates.
Step-by-step explanation:
The effect of high interest rates on people who want to borrow money is quite significant. When interest rates are high, the cost of borrowing money increases, leading to a scenario where both businesses and households may hesitate to take out loans. Specifically, businesses might curtail borrowing for investment purposes, and households may avoid taking loans for large purchases like homes and cars. This is due to the higher expenses associated with servicing the debt, which can lead to reduced consumption and investment spending. Furthermore, high interest rates can deter individuals from seeking loans for immediate consumption, potentially leading to a decrease in economic activity.
On the contrary, when there is an increase in the amount of available loanable funds, a situation may arise where there are more potential lenders than borrowers. This can result in competition among lenders, which typically drives down the price of borrowing, meaning that interest rates decrease. Thus, the availability of loanable funds can have an inverse relationship with interest rates.