The level of interest rates plays an extremely important role on either the supply side or the demand side of very many other important markets in the economy, and for that reason interest rates are often perceived by government policy makers as a potentially powerful tool for manipulating the economy in the interests of promoting growth, controlling inflation, stimulating exports and so on. Large-scale investment projects by business firms such as building new factories (or starting up new businesses) are often financed largely by borrowing, and the level of interest rates plays an important role in determining whether a particular investment project under consideration seems likely to be profitable or not. Thus, a period of very high interest rates (especially very high long-term interest rates) is likely to reduce greatly the amount of new investment undertaken -- with obvious short-term consequences for the level of employment in the construction and machine-tools industries and with longer-term consequences for the country's overall economic growth in the future. Similarly, the level of interest rates plays a large role in the willingness and ability of consumers to purchase new houses, recreational vehicles, automobiles, refrigerators and other big ticket items -- with important implications for the profitability and level of employment in these industries. Interest rates available on savings accounts, bonds, and the like play a role in determining household decisions about how much income to save and how much to spend on immediate consumption. Interest rates (and especially their relationship to the levels of interest rates in other countries) also play a crucial role in affecting the volume of savings entering the country from abroad for local investment or leaving the country for foreign investment purposes -- thus influencing not only investment activity but also the exchange rates of the domestic currency in relation to foreign currencies, and thus the attractiveness of the country's exports to potential purchasers abroad. For all these reasons (and others), governments in the 20th century are nearly always deeply involved in deliberate efforts to influence interest rates by means of monetary policies that encourage the expansion (or, occasionally, contraction) of the money stock through regulatory pressures on the banking system.
[See also: monetary policy , banking , supply, law of , demand, law of ]