1.2.5 The wider economic environment

Question 1

What are interest rates?

Answer 1

The price of borrowed money. In a loan Interest rates vary depending on the level of risk involved.

Question 2

What is the impact on businesses if interest rates increase?

Answer 2

• Less likely to borrow money to expand
• slower growth
• Fewer new businesses starting up
• May slow down on investment
• Falling demand

Question 3

What is the impact on consumers if interest rates increase?

Answer 3

• Less likely to borrow money to buy cars or holidays
• May reduce credit card spending
• Mortgage repayments will increase leaving people with less disposable income
• Standards of living may fall.

Question 4

What is the impact on businesses if interest rates Decrease?

Answer 4

• Increase in investment and businesses will be trying to expand
• Lower cost of borrowing may lead to more start up businesses being created
• Many businesses will experience a rise in demand

Question 5

What is the impact on consumers if interest rates decrease?

Answer 5

• Consumer spending may increase as it is cheaper to borrow money with loans and credit cards.
• Higher standards of living
• Mortgage payments may decrease leaving more disposable income.

Question 6

What are exchange rates?

Answer 6

The price of one currency expressed in terms of another.

Question 7

Most exchange rates ‘float’ what does that mean?

Answer 7

The price may go up or down

Question 8

What does it mean if a currency depreciates?

Answer 8

The currency goes down in value

Question 9

What does it mean if a currency appreciates?

Answer 9

The currency goes up in value

Question 10

What happens if the pound appreciates?

Answer 10

S - strong
P -pound 
I - imports
C - cheap
E - exports 
D - dear

Question 11

What happens if the pound depreciates?

Answer 11

W - weak
P - pound
I - Imports
D - dear
E - exports
C - cheap

Question 12

What does Tax revenue pay for?

Answer 12

Government spending

Question 13

What is direct tax?

Answer 13

Tax on earnings

Question 14

what are examples of direct tax?

Answer 14

Income tax, national insurance and corporation tax

Question 15

What is indirect tax?

Answer 15

Tax on spending

Question 16

What are some examples of indirect tax?

Answer 16

Value added tax, car tax, insurance tax and excise duties (e.g. tax on petrol or alcohol)

Question 17

What is corporation tax?

Answer 17

A tax on the profits a business makes.

Question 18

If there is a decrease in corporation tax what affect will it have on businesses?

Answer 18

Businesses will be able to keep more of their profits, therefore encouraging them to invest in future growth.

Question 19

If corporation tax is very high in a country what affect will it have on foreign businesses?

Answer 19

This will be unattractive for foreign businesses to want to move in to that country.

Question 20

If the government increases taxes on alcohol what will alcohol businesses face?

Answer 20

A fall in demand for alcohol

Question 21

If there is a rise on direct taxation what will the happen to demand and why?

Answer 21

Many products will see a fall in demand for their products and services because consumers will have less disposable income to spend.

Question 22

If there is a rise on indirect taxation what will the happen to demand and why?

Answer 22

There will be a fall in demand for many goods and services as an increase in indirect tax (such as VAT) will mean an increase in goods and services. Leading to a decrease in consumer spending.

Question 23

Define unemployment?

Answer 23

The number of people able and willing to work that don’t have a job.

Question 24

What will rising unemployment cause?

Answer 24

• Less people will have disposable income
• Businesses selling luxury or non essential goods will see a fall in demand for their products and services
• Some businesses will see an increase in in demand as people with less money will switch to cheaper substitutes.
• Wages are less likely to rise
• Businesses can find it easier to recruit

Question 25

What will falling unemployment cause?

Answer 25

• Consumers will have more disposable income
• Most businesses will see an increase in demand for their products, especially businesses selling luxury goods.
• Businesses that sell cheaper substitutes may see a fall in sales as fewer people are on restricted incomes
• Wages are likely to increase as employers compete to attract the best people available

Question 26

What is inflation?

Answer 26

A sustained increase in the average price level in the economy; there is a fall in the value of money.

Question 27

How is the rate of inflation measured?

Answer 27

The percentage change in the level of prices.

Question 28

What is deflation?

Answer 28

A sustained fall in the general price level

Question 29

What is the governments target rate for inflation?

Answer 29

2%

Question 30

Who controls the level of inflation and how?

Answer 30

The Bank Of England, by adjusting the base rate (The rate of interest banks are charged when borrowing from the BOE)

Question 31

Why does inflation cause uncertainty?

Answer 31

It creates uncertainty and instability because it is hard to know whether it will accelerate or slow down

Question 32

What impact can the rate of inflation have on businesses?

Answer 32

• Less likely to invest due to uncertainty regarding future costs
• cost of supplies and wages are rising which can reduce profitability for businesses potentially leading to them putting up prices causing a fall in quantity demanded.
• ## Some pensions and kinds of investment income do not rise with inflation and some people will not have received a pay rise, causing people affected to have less disposable income to spend on goods and services.