Final answer:
A decrease in interest rates usually results in increased lending and borrowing, which stimulates investment and consumption, potentially leading to higher short-run economic growth. However, sustained low interest rates could lead to inflation.
Step-by-step explanation:
If the interest rate goes down, according to loanable funds theory, it generally suggests that there is an increase in loanable funds available in the market. This increase happens when more people or institutions are willing to lend money, essentially bidding the cost of borrowing down. In the short-run, a decrease in interest rates makes borrowing less expensive, which in turn encourages investment and consumption by businesses and consumers. As a result, economic activity tends to increase, leading to a potential uptick in the rate of growth.
Specifically, when businesses borrow more due to lower interest rates, they can invest in capital, hire more workers, and increase production. Consumers with access to cheaper loans can spend more on goods and services. This collective increase in investment and consumption can drive economic growth in the short-run. However, it's important to note that if interest rates remain low for a prolonged period, it might lead to overheating of the economy and inflation.