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

reasons for rises due to cost push inflation

Answer 2

1. price of raw materials increase
2. wages start to rise = compensate for higher prices
3. firms have to increase prices
4. inflationary cycle starts again

Question 3

reasons for demand pull inflation

Answer 3

1. consumer spending strong
2. business cant keep up with demand
3. business can increase prices

Question 4

high inflation

Answer 4

prices go up and value of money goes down

Question 5

positive impacts of high inflation on businesses

Answer 5

1. industry wide prices rise = revenues grow = increase gross profit
2. debt as SOF cheaper in real terms inflation erodes real value of existing debts
3. caused by higher consumer demand in economy and for short period before costs rise = increase profit margins

Question 6

negative impacts of high inflation on businesses

Answer 6

1. cost of raw materials rise = price= margins = international competitiveness
2. long contracts at fixed price =raw materials increase =decrease profit margin
3. rising inflation higher interest rates & decrease economic growth (demand) = recession

Question 7

imports and exports

Answer 7

import raw materials
export finished goods

imports > exports
firms suffer from decrease in exchange rate

imports < exports
firms benefit from decrease in exchange rates

Question 8

unemployment

Answer 8

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

Question 9

adv and dis of high unemployment on businesses?

Answer 9

adv:
1. large “pool” of labour to chose
2. low wage growth
3. demand for inferior good rise
4. low staff turnover

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

Question 10

impact of low unemployment on businesses?

Answer 10

adv:
more people have jobs = more income to spend on goods/services
higher moral/motivation

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

Question 11

changing demand in economy & controlling demand

Answer 11

2 methods to control demand for goods and services:

1. monetary policy
2. fiscal policy

Question 12

monetary policy

Answer 12

(Bank of England)

control demand by increasing/decreasing interest rates

Question 13

fiscal policy

Answer 13

(government)

control demand by increasing/decreasing taxes

Question 14

interest rate policy

Answer 14

expressed as a % of money saved or borrowed

controlled by monetary policy committee part of Bank of England

Question 15

impact of changes in interest rate policy

interest rate goes up

Answer 15

businesses are disadvantaged

1. amount consumers pay of loans/credit cards goes up
2. interest on savings goes up, people save rather than spend
3. consumers = less money to spend on goods
4. business costs of debt repayments will rise

Question 16

impact of changes in interest rate policy

interest rate goes down

Answer 16

businesses benefit

1. amount consumers pay on loans/credit cards goes down
2. interest on savings goes down = people spend rather than save
3. consumers have more money to spend on goods
4. business costs of debt repayments will fall

Question 17

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

Answer 17

1. monetary policy

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

Question 18

types of taxes

Answer 18

2 types:

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

Question 19

expansionary fiscal policy

Answer 19

cut personal income tax rates = increase disposableincome cons demand increase

cut indirect taxes = lower costs and prices = cons demand increase

cut in corporation tax = high post tax profits for bus = add to business capital spending or investment

cut in tax on interest from saving = increase disposable income of people with net savings = increase cons demand

Question 20

business cycle

Answer 20

y-axis = GDP growth

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

Question 21

boom

Answer 21

high lvl consumer spending business confidence, profit, inv price and costs tends to rise faster, unemployment low

sales/rev/profit high (if normal good)
high costs and inflation=low unemployment upward pressure on wages, high bus inv CU high, increase cons demand

Question 22

pressure on wages

Answer 22

upward pressure on wages due to high inflation = workers seek to gain an increase in wages to meet the rising prices and maintain living standards

Question 23

recession

Answer 23

less cons spending(demand falls) = lower profits for bus = less inv, spare capacity increase, increase unemployment = downward pressure on wage

low sales/rev/profit (unless inferior)
decrease cost and inflation

Question 24

slump/depression

Answer 24

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

really low sales/rev/profit (unless inferior)
decrease competitors, cut costs = survive, and capacity inv unlikely

Question 25

recovery

Answer 25

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