2.5

Question 1

What may importers do when exchange rate changes?

Answer 1

• May switch international suppliers when the exchange rate is less favourable
• Stockpile raw material and products when currency is strong

Question 2

What may exporters do when exchange rate changes?

Answer 2

• lower prices to limit the impact of a strong currency
• increase promotion in foreign markets when currency is weak

Question 3

What is inflation?

Answer 3

The general rise in prices over time.
Measured by the consumer price index (CPI).
A low rate of inflation can be managed by businesses but a high rate will increase costs and reduce demand

Question 4

What may a business do during high inflation?

Answer 4

• May increase prices to pass costs on to consumers or may decide to absorb the cost rises
• Will look to reduce internal costs to protect profits
• Price rises may fuel further inflation

Question 5

What may a business do during low inflation?

Answer 5

• Businesses feel confident in a stable economic environment
• Business may look to invest and grow

Question 6

What may a business do during deflation?

Answer 6

• Business may struggle to pay debts - assets may have to be sold to pay off debts if deflation persists
• Low demand may lead to redundancies and rationalisation