2.5

Question 1

Problems Caused by Inflation

Consumers change spending habits

Answer 1

Deters consumers from making significant purchases and they may reduce demand for usual lower priced wants too e.g cinema tickets
Purchasing on credit becomes more expensive

Question 2

Problems Caused by Inflation

increased costs

Answer 2

Workers often demand higher wages to compensate for the increase in the cost of living
**
Suppliers increase the cost of raw materials and components
Utilities such as electricity become more expensive

Question 3

what is the interest rate

Answer 3

a percentage reward offered for saving money and the percentage charged for borrowing money

Question 4

what happens when interest rates increase?

Answer 4

businesses will have to** pay more** on new or variable rate borrowing which will** increase their costs**

Businesses may be less willing to make capital investments when their retained profit may be more profitably invested into savings schemes

Customers are less likely to purchase goods on credit when interest rates are high leading to a fall in sales

Exporting businesses may see demand for their products overseas fall as higher interest rates usually strengthen the value of the domestic currency and make their products comparably more expensive abroad

Question 5

what is direct tax?

Answer 5

Direct taxes are levied on income e.g. Income tax and Corporation Tax

Question 6

what is indirect tax

Answer 6

Indirect taxes are levied on spending e.g Value added tax (e.g. VAT)

Question 7

The Impact of an Increase in Taxation on:

Revenue

Answer 7

Revenue may fall for many businesses

Increased income tax will reduce the disposable income of customers and demand for products may fall

Increased VAT will make products more expensive and** customers may switch to alternative products**

Question 8

The Impact of an Increase in Taxation on:

Costs

Answer 8

Operating costs will rise as a result of increased taxes such as VAT and National Insurance contributions

Higher costs may be offset by charging higher prices

Higher prices may lead to lower sales and profit may fall

Import costs are increased when customs duties are raised

Question 9

The Impact of an Increase in Taxation on:

Business Decisions

Answer 9

Business spending and investment may be affected by increases in Corporation tax as less profit will be retained to cover future expenses and make plans for business expansion

Operational decisions may be affected by increases in business rates and taxes related to employing workers

Businesses may choose to forego business improvement or relocation, or employ fewer workers as a result of increased costs

In some cases businesses may take steps to try to avoid paying specific taxes or pay lower rates of taxation
Move the business to a low-tax location
Change production methods to reduce the use of highly-taxed components

Question 10

characteristics of recession and their impact on business

Increasing/high unemployment

Answer 10

Customers have** less disposable income ** and are likely to reduce spending

Businesses may find it relatively easy to recruit workers from a larger pool of candidates

Question 11

characteristics of recession and their impact on business

Low confidence for firms/households

Answer 11

Businesses may delay spending decisions and focus on reducing risk and survival

Production levels are likely to be **reduced **

Businesses often** stockpile** products

Question 12

characteristics of recession and their impact on business

Low inflation or deflation

Answer 12

Customers may postpone significant spending decisions leading to lower revenue

Question 13

characteristics of recession and their impact on business

Increase in government expenditure

Answer 13

Increased spending on welfare benefits and spending on infrastructure projects to inject demand into the economy may benefit some businesses

Question 14

characteristics of a boom and their impact on business

Decreasing unemployment and increasing job vacancies

Answer 14

Customers’ disposable income increases leading to higher sales revenue

Recruitment and Staff retention may become more challenging and businesses may need to pay higher wages

Question 15

characteristics of a boom and their impact on business

High confidence and more risky decisions taken

Answer 15

Businesses look to expand and maximise profit

Production levels are likely to be increased

Product or market development strategies are more likely

Question 16

characteristics of a boom and their impact on business

Increasing rate of inflation

Answer 16

Interest rates are likely to rise and the higher cost of borrowing will increase the risk of capital investment

Question 17

characteristics of a boom and their impact on business

An improvement in the government budget as tax revenues rise and government expenditure falls

Answer 17

Lower government spending may impact on business growth plans

Public sector pay controls may cause Industrial unrest and affect business operations

Question 18

The Effect of Economic Uncertainty on the Business Environment

when does economic uncertainty happen?

Answer 18

when it is difficult to forecast the level of supply and demand in an economy

Question 19

The Effect of Economic Uncertainty on the Business Environment

businesses will find planning ____

Answer 19

Businesses will find planning difficult and are likely to be reluctant to make significant decisions especially with regards to capital expenditure

Question 20

how can a business prepare for economic uncertainty

Answer 20

Building up cash reserves when times are good

Being ready to take advantage of opportunities when they arise