2.5.1 Economic influences

Question 1

causes for inflation

Answer 1

1. cost push inflation (costs to business rise and passed on to customers)
2. demand pull inflation (increase in number of people who want something whose supply cant keep up)

Question 2

2 reasons for rises due to cost push inflation

Answer 2

1. price of raw materials increase
2. wages start to rise = compensate higher prices

firms = increase prices = inflationary cycle again

Question 3

2 reasons for demand pull inflation

Answer 3

1. consumer spending strong
2. cant keep up with demand

increase prices

Question 4

high inflation

Answer 4

prices go up and value of money goes down

Question 5

3 positive impacts of high inflation on businesses

Answer 5

1. prices rise = revenues = increase gross profit
2. debt as SOF cheaper (real terms) erodes real value of existing debts if debt repayment terms are fixed
3. higher consumer demand=increase profit (before costs)

Question 6

3 negative impacts of high inflation on businesses

Answer 6

1. cost of raw materials rise = price, protect margins = international competitiveness
2. contracts at fixed price = raw materials increase cant increase price = decrease profit margin
3. higher interest rates and decrease economic growth (demand) = recession

Question 7

imports and exports

Answer 7

import raw materials and components
export finished goods

imports > exports
suffer from decrease in exchange rate

imports < exports
benefit from decrease in exchange rates

Question 8

appreciation

Answer 8

SPICED 
STRONG 
POUND 
IMPORTS 
CHEAP 
EXPORTS 
DEAR

Question 9

depreciation

Answer 9

WPIDEC 
WEAK 
POUND 
IMPORTS
DEAR 
EXPORTS 
CHEAP

Question 10

unemployment

Answer 10

someone is willing and able to work but is unable to find a job

Question 11

impact of high unemployment on businesses?
4 adv
3 dis

Answer 11

adv: 
1"pool" of labour to chose from
2low wage growth 
3demand for inferior rise 
4low staff turnover 

dis:
1disposable income = less elastic goods
2low morale and uncertainty in work force
3social problems may rise e.g. shoplifting

Question 12

impact of low unemployment on businesses?
2 adv
3 dis

Answer 12

adv:
1disposable income
2moral/motivation

dis:
1upward pressure on wages
2high staff turnover = headhunting
3harder to recruit

Question 13

changing demand in economy

2 methods to control

Answer 13

2 methods to control demand for goods and services:

1. monetary policy
2. fiscal policy

Question 14

monetary policy

Answer 14

(Bank of England)

control demand by increasing/decreasing interest rates

Question 15

fiscal policy

Answer 15

(government)

control demand by increasing/decreasing taxes

Question 16

interest rate policy

Answer 16

expressed as a % of money saved or borrowed

controlled by monetary policy committee part of Bank of England

Question 17

4 impacts of changes in interest rate policy

interest rate goes up

Answer 17

businesses are disadvantaged

1. consumers loans/credit cards goes up
2. interest on savings goes up, (save not spend)
3. consumers = disposable income less
4. costs of debt repayments will rise

Question 18

impact of changes in interest rate policy

interest rate goes down

Answer 18

businesses benefit

1. consumers loans/credit cards down
2. savings goes down = spend
3. business costs of debt repayments will fall

Question 19

2 methods to control demand for goods/services in economy:

Answer 19

1. monetary policy

2. fiscal policy (increasing/decreasing taxes or government spending (expenditures))

Question 20

types of taxes

Answer 20

2 types:

1. direct (tax on income or profits)
2. indirect (tax on goods/services)

Question 21

expansionary fiscal policy

Answer 21

cut taxes:
personal income = disposable income = demand

indirect taxes = lower costs & prices= demand

corporation tax = post tax profits = bus capital spending or investment

tax on interest from saving = disposable income on net savings = demand

Question 22

business cycle

Answer 22

y-axis = GDP growth

1. boom
2. recession
3. slump
4. recovery
5. boom
6. recession

Question 23

boom

Answer 23

consumer spending = rev (normal good) profit =demand
business confidence,
price and costs tends to rise faster (inflation) unemployment low
upward pressure on wages, high bus inv CU

Question 24

pressure on wages

Answer 24

upward pressure on wages high inflation = increase in wages= rising prices & maintain living standards

Question 25

recession

Answer 25

less spending (inferior) and confidence = profits = less inv spare capacity increase = demand falls , increase unemployment = downward wage pressure

decrease cost and inflation= increase
job vacancies = lots of applicants

Question 26

slump/depression

Answer 26

very weak consumer spending and bus investment, many bus failure, rapid rising unemployment prices falling

really low sales/rev/profit (unless inferior)
some - out of bus, decrease competitors, bus profits very low prices and sales rev fall = make a loss, cut costs = survive, and capacity inv unlikely

Question 27

recovery

Answer 27

positive growth and a move out of recession
things begin to improve cons begin to increase spending, bus = more confident and start invest again = time for unemployment to stop growing

sales/rev/profit being to increase
costs not yet rising unemployment still high = no upward pressure on wages
bus inv = may start to increase, still cautious

Question 28

falling inflation rate

Answer 28

2% to 1%

prices not going down, just rising more slowly

Question 29

deflation

Answer 29

rare: average prices are falling

- 1.5%