Explain the relationship between interest rates and (1) investments in housing, and (2) business investments

As the interest cost of a home mortgage is the major component of the total cost of owning a house, fewer families will want to purchase new homes as interest rates rise. Thus, higher interest rates will reduce expenditures on housing.

Business investment is also sensitive to interest rates. Because the rate of interest that must be paid on borrowings is part of the cost of an investment, business executives will find investment prospects less attractive as interest rates rise. Therefore, they will spend less.