2.5

Question 1

What are six external influences on businesses?

Answer 1

• Government.
• Legislation and regulation.
• Economic climate.
• Pressure groups.
• Environmental factors.
• World events.

Question 2

What are economic influences?

Answer 2

When a business is affected in any way by economic factors.

Question 3

What is inflation?

Answer 3

Inflation is when the general price level is rising.

Question 4

How is inflation measured?

Answer 4

By calculating changes in the consumer price index (CPI). The government would record price changes of about 600 goods and services. From these records, an average price change is calculated and converted into an index number.

Question 5

Why is high and fluctuating inflation likely to be damaging to businesses?

Answer 5

• Increased costs (may result in price increases to maintain profitability).
• Uncertainty (businesses don’t know what prices will be in future).
• Borrowing and lending (inflation initially benefits borrowers and harms lenders).
• Consumer reactions (inflation causes consumers to save money so businesses will sell less).
• International competitiveness (high inflation can affect businesses that import or export goods and services. If UK has higher inflation than its trading partners, UK businesses will become uncompetitive).

Question 6

What is deflation?

Answer 6

Where the general price level starts to fall.

Question 7

What does deflation mean for businesses?

Answer 7

Businesses may have to lower their prices, which can reduce their profits.

Question 8

What are exchange rates?

Answer 8

The price of one currency in exchange for another.

Question 9

What is appreciation (aka a strong value of the pound)?

Answer 9

Appreciation means that there is a rise in the pound against other currencies. This means the pound can buy more foreign currency.

Question 10

What is depreciation?

Answer 10

Depreciation is a fall in the pound

Question 11

What does appreciation of the pound mean for imports and exports?

Answer 11

Strong 
Pound 
Imports 
Cheaper
Exports 
Dearer (more expensive)

Question 12

What does depreciation of the pound mean for imports and exports?

Answer 12

Weak 
Pound 
Imports 
Dearer (more expensive)
Exports
Cheaper

Question 13

Define interest rates.

Answer 13

The cost of borrowing money.

Question 14

What will happen if interest rates rise?

Answer 14

Consumer and business spending will fall.

Question 15

What will happen to interest rates if inflation is high?

Answer 15

Interest rates will rise.

Question 16

What happens as a result of rising interest rates?

Answer 16

The cost of borrowing rises so the cost of supplies for a business may increase.

Question 17

What happens as a result of a fall in interest rates?

Answer 17

The cost of lending falls —> possible increased profits.

Question 18

What happens to demand when interest rates rise?

Answer 18

Demand is pushed down.

Question 19

What happens to demand when interest rates fall?

Answer 19

Demand usually increases.

Question 20

How is business affected by increases in taxation? (3)

Answer 20

• High taxes = higher costs —> less retained profit —> less investment in new machinery for expansion/growth
• Increases in taxation often leads businesses to try to avoid paying tax.

If % of VAT rises, a business could pass this cost on to the consumer so it makes goods more expensive to buy.

Question 21

How is business affected by a decrease in taxes? (2)

Answer 21

• Lower taxes can result in more demand in the economy and lead to higher output and employment.
• Reducing VAT on some items can stimulate demand.

Question 22

How does the government spend the taxes that it collects?

Answer 22

The tax collected goes into a central pot- this is then spent on various things for the benefit of the UK society.

Question 23

What impact might a cut to government spending have on businesses?

Answer 23

A cut to government spending can have an impact on businesses which supply goods and services to public organisations, e.g. NHS.

Question 24

During a boom in the business cycle, what will happen to demand, wages, profits, prices, output and business confidence?

Answer 24

Demand will be rising, wages will be rising, profits rising, prices may be rising, increased output, business confidence is high.

Question 25

During a downturn in the business cycle, what will happen to demand, growth of the economy, growth of businesses, profits and prices?

Answer 25

Economy still growing but at a slower rate, demand will flatten out or begin to fall, firms will stop expanding, profits may fall, prices rise more slowly.

Question 26

During a recession or a depression, what happens to demand, profits, prices, and rates of employment?

Answer 26

Demand falls, lower profits, businesses makes redundancies to lower costs, prices become flat.

Question 27

What is a slump in the business cycle?

Answer 27

The bottom of the business cycle where consumer confidence and spending is at its lowest.

Question 28

During a recovery or upswing in the business cycle, what happens to demand, employment and prices?

Answer 28

Demand starts to rise, unemployment starts to fall and prices start to rise again.

Question 29

What affect does economic uncertainty have on the business environment? (3)

Answer 29

• Decision making: e.g. rising/falling interest rates can have an impact on some strategic business decisions.
• Unexpected events: economic events can fluctuate, sometimes alarmingly, having a very unsettling effect on business.
• Business confidence: If levels of uncertainty are high, business decision-makers are more likely to be pessimistic and lack the confidence to invest.