2E Flashcards
(30 cards)
What is Inflation
An increase in the average price level in an economy
Low inflation=
Prices rise slowly, demand for goods/services may increase-consumers may have more money to spend.
What is deflation
Prices go down, negative inflation
Disinflation
Falling rate of inflation
positive effects on business of inflation
Consumers’ money increases, demand for goods increases, higher profit margins
Negative effects on business of inflation
wage prices spiral-labour demanding higher wages. Loss of confidence, value of money decreases, less demand, lower profit margins.
Can lead to increased unemployment
CB for effects of inflation
Depending on PED, if demands elastic- increased price will lead to a more proportional fall in demand, if demand inelastic will be little demand.
Positives of a recession
Cheaper labour, lower inflation, demand for inferior goods increased.
Negatives of a recession
lower investment, low consumer confidence, lower demand for luxury goods, increased risk of business failuer.
What is the exchange rate
The value of a currency in terms of another
For a business that imports what are the effects of a stronger pound and a weaker pound
Stronger pound- lower business costs- lower cost of raw materials- lower profit margins
Weaker pound-Higher business costs-increased raw material costs, lower profit margins.
For a business that exports What are effects of a stronger pound and weaker pound
Stronger pound-higher business costs, higher costs for raw materials, lower profit.
Weaker pound-lower business costs, lower costs of raw materials, higher profit margins.
CB points for effects of x change rate
Depends on size of appreciation/dep
PED of product.
What are interest rates
cost of borrowing and the reward for saving.
Increased IR effects
-Higher incentive to save- lower disposable income- lower demand.
-Lower investment, due to higher save.
-Higher availability of credit- banks reward increase, so they make more options to borrow.
-higher cost of borrowing therefore lower business growth.
-Increased IR lead to appreciating exchange rate.
Decreased IR effects
Lower incentive to save-= higher disposable income- higher demand for goods.
-Higher investment
-Lower credit- banks give less options to borrow as reward has decreased.
-lower costs borrowing, higher business growth.
-decreased IR- depreciating exchange rate.
CB for effects of IR
Depends on size of change, depends if loans are fixed or variable, depends on consumer confidence, depends the proportion of income the prodcut is.
What is corporation tax
Tax on business proftis
What is VAT
Tax on goods and services.
Increased C tax effects, negatives
-lower profit margins
-lower investment
-Lower business growth
-Lower r and d spending
Positive effects of increased C tax
Increased gov budget
increased gov spending- education up
increased subsidies for business
Higher-income tax effects
decreased motivation, lower productivity, less disposable income, lower demand for goods, lower cc
Higher VAT effects
Lower demand for goods and services
What is legislation
Involves creating and enacting laws in order to protect individuals, firms and society as a whole.
