Generally, when consumers save more money and buy fewer items, the economy will slow down due to the decreased demand for products. This could lead to workers being laid off, and the economy may head into a recession. There is no guarantee, however, that increased savings will lead to lower interest rates or will harm the economy. If the economy remains relatively strong, more savings may not necessarily translate into less demand for products. Consumers may still demand the same amount of products while saving the additional income they may have.
The big assumption is that if interest rates drop, consumers may take out loans and buy more products. Also, it is assumed that businesses will also take out loans to expand their businesses. However, if confidence in the economy isn’t strong, there is no guarantee that the demand for loans or for products will increase. Consumers and business owners may feel more comfortable holding onto their money instead of investing or spending it.