2.5 External influences

Question 1

What is inflation?

Answer 1

The percentage rate at which average prices rise during a year within the whole economy

Question 2

What is the effect of inflation on consumers?

Answer 2

Money loses its value/people lose confidence in money as the value of savings is reduced

Price increase leads to higher wage demand as people try to maintain their living standards.

Consumers on fixed incomes e.g pensioners lose out because their real incomes fall

Question 3

What are the effects of inflation on a business?

Answer 3

Fixed costs may rise which may damage profitability

Reduces real value of money

UK businesses may lose competitiveness against foreign rivals whose costs are likely to be rising more slowly

Question 4

What are exchange rates?

Answer 4

The value of one currency expressed in terms of another currency

Question 5

What are the effects of exchange rates on businesses?

Answer 5

Strong
Pound
Imports
Cheaper
Exports
Dearer

Question 6

What are interest rates?

Answer 6

The amount charged by a lender per year for borrowing money.

Expressed as a % of the amount of money outstanding