2.5.1- Economic Influences

Question 1

Inflation

Answer 1

sustained rise of the general price level over a period of time

the inflation rate is the percentage by which the general price is increasing

ideal percentage is 2%

Question 2

Consequences of changes in inflation on business

Answer 2

• inflation rise = rise in cost of products + services
• cost of supplies, ingredients and raw materials will go up
• profit margins will be squeezed
• real wage rate reduced as inflation rises, increasing unemployment

Question 3

Exchange rate

Answer 3

• the price of one currency in exchange for another

- a rise in the £ against other currencies means the £ can buy more foreign currency

Question 4

Exchange rates linked with interest rates

Answer 4

as interest rates fall then there is less saving and investment in UK so there’s less demand for £ so the value of the £ will fall

Question 5

SPICED

Answer 5

Strong 
Pound 
Imports
Cheap 
Exports
Dearer

Question 6

Interest Rate

Answer 6

The cost of borrowing money

• if interest rates rise the cost of borrowing will rise
• a fall in interest rates means the cost of servicing debt falls

Question 7

Government Spending and Taxation

Answer 7

-extra government spending or lower taxes can result in more demand in the economy and lead to higher output and employment

Question 8

Types of tax

Answer 8

• income tax- taken off an employee’s salary
• corporation tax- tax on company profits
• VAT
• national insurance

Question 9

Monetary policy

Answer 9

where the government manipulate rate of interest, the amount of money circulating in the economy, and amount of credit available from the banks in order to achieve their political party’s objectives

Question 10

The Business Cycle

Answer 10

Boom- high prices/spending/high consumer spending
Recession- investments fall/ low profits/ redundancies
Slump- more redundancies/ high unemployment/ low consumer spending
Recovery- increased production/ wages rise/ unemployment declines

Question 11

Types of goods

Answer 11

normal goods- as income increases so does demand
inferior goods- as income increases demand decreases
luxury goods- income rises consumers may substitute items for these types of goods