Higher interest rates encourage savings. Higher interest rates discourage consumption, which results in lower demand for goods and services. Higher interest rates increase the cost of borrowing money which lowers both consumption and investment. Lower consumption and investment result in slower economic growth, weaker job creation, and higher unemployment. Fiscal policy is reflected in how government spends money and its taxation policy.
Government has two roles in the economy.
The first is to redistribute wealth to ensure a degree of equity among the population. The second is to provide short-term stability in the event of an economic downturn. For instance, government will often increase its spending in a recession to offset declines in consumption and investment. Government spending based on taxes and domestic borrowing simply replaces spending by business and consumers. Government spending based on foreign borrowing leads to higher GDP in the short term, higher debt and debt financing costs, and lower GDP in the long term .