To finance this expansion, they borrow. Therefore, the demand for loans increases and interest rates also rise. When the economy slows down, businesses produce less and borrow less. The demand for loans drops, and interest rates fall. Government Policy .
Governments can influence interest rates by increasing or decreasing the money supply.
When the money supply increases, interest rates drop. When the supply decreases, rates go up. During periods of inflation, when prices are increasing in a country's economy, any given amount of money buys less than it did before. During these times lenders try to protect their incomes by raising interest rates. Length of a loan .