1.5.4 The economy and business

Question 1

What are the 6 factors that impact the economic climate of a business?

Answer 1

• unemployment
• changing levels of consumer income
• inflation
• changes in interest rates
• government taxation
• changes in exchange rate

Question 2

What is the impact of low unemployment?

Answer 2

• pro: demand for most goods will be high

- con: may be labour shortage which will make people press for higher pay

Question 3

What is the impact of high unemployment?

Answer 3

• pro: large numbers seeking work keeps pay demands down, and stops staff leaving for better paid jobs\
• con: demands for luxury goods fall and manufacturers may worry about retail customers collapsing

Question 4

What is the impact of government taxation?

Answer 4

• government taxes people and goods-import taxes charged on goods
• the higher the rate of tax, the harder it is for people to spend and the worse it is for businesses
• corporation tax-remaining profits is taxed at 20%. companies want government to reduce corporation tax

Question 5

What is the impact of exchange rates-fall in pound value?

Answer 5

> prices of exports fall-increase sales
prices cheaper to foreigners-tourism increases
imports more expensive-costs rise

Question 6

What is the impact of exchange rates-rise in pound value?

Answer 6

> prices of exports rise-sales fall
prices more expensive for foreigners-tourism falls
imports cheaper-costs fall

Question 7

What is the impact of interest rates-falling interest rates?

Answer 7

• business will have more money to spend and cash flow is improved
• businesses may borrow money for a start-up or expansion
• customers are more likely not to save and spend their money

Question 8

What is the impact of interest rates-rising interest rates?

Answer 8

• businesses may struggle to repay loans
• small businesses are less likely to borrow money to start-up or expand
• customers are less likely to spend money as saving money

Question 9

What is the impact of inflation?

Answer 9

• sharp rise=businesses costs to rise, impacting profit

- consumer cost rise=less disposable income, meaning they buy fewer goods and services

Question 10

What is the impact of high demand/economic activity?

Answer 10

• consumer incomes rise
• inflation may rise
• unemployment may fall
• interest rates may rise
• the pound may become stronger

Question 11

What is the impact of low demand/economic activity?

Answer 11

• consumer incomes fall
• inflation may fall
• unemployment may rise
• interest rates may fall
• the pound may become weaker