> why the demand shrinks when there's not enough new investments? The way I understand it: when interest rates increase, the ROI for any investment goes down,

> why the demand shrinks when there's not enough new investments? The way I understand it: when interest rates increase, the ROI for any investment goes down, which makes many new investments risky or worthless. Thus investments in new projects go down, which reduces the demand. The investment could be a new shop, raw materials for new buildings, software projects, etc. When it's said the "demand" decreases, its not the want that goes away but the ability of people to realize the want that goes away. > if demand does not shrink by much, shouldn't the same number of workers be kept employed to fulfill the demand for goods? Depends. If the cost of doing business rises, the profit decreases. To maintain value, there could be a decrease in headcount increase or layoffs. > it means the economy is heavily reliant on industries/sectors which relies on new investments (aka growth) I think (and someone who is more aware can correct me), it boils down to the ROI. Why would any business investment in something with risk when the ROI doesn't make it worth it. If the risk-free interest rate 5%, any investment with a ROI of say 7% or below (higher for riskier investments) are out of the question. Any entity could make money by saving at the risk free rate.