1.2.5 the wider economic environment

Question 1

What does an increase in interest rates do for a firm?

Answer 1

It makes it more expensive to take out a loan and borrow money, which could result in fall in spending + investment. If profits fall due to lower sales, firms might reduce the size of their workforce.

Question 2

What are indirect taxes?

Answer 2

Imposed by the government and they increase production costs for producers.

Question 3

Where does incidence of indirect taxes fall when demand is perfectly inelastic?

Answer 3

Completely on the consumer.

Question 4

Where does incidence of indirect tax fall if supply is perfectly elastic?

Answer 4

Completely on the supplier.

Question 5

Where does incidence of indirect tax fall if demand is more elastic (PED>1)?

Answer 5

Mainly on the supplier.

Question 6

Where does incidence of tax fall if demand is more inelastic (PED<1)?

Answer 6

Mainly on the consumer.

Question 7

What happens to wages when there is a higher rate of unemployment?

Answer 7

They have a larger supply of labour to employ from, and so wages fall which helps firms to reduce their costs.

Question 8

What producers will see a rise in sales if there is a higher rate of unemployment?

Answer 8

Consumers have less disposable income, and so producers which sell inferior goods might see a rise in sales.