2.5.1 Economic Influences

Question 1

Inflation

Answer 1

persistent rise in prices which reduces purchasing power

Question 2

effects on businesses of changes in inflation

Answer 2

▪ Cost and therefore pricing implications​

▪ Workers pay claims​

▪ Uncertainty​

▪ Changes in consumer spending habits​

▪ International competitiveness

Question 3

Exchange rates

Answer 3

The price of one currency in terms of another. E.g. $2=£1

Question 4

Impact of appreciation in the UK

Answer 4

Products exported from the Uk appear expensive- exporting business sell less​

Products imported into UK will be cheaper​

UK firm costs reduce buying products abroad

Question 5

Impact of depreciation in the UK

Answer 5

Products exported from the UK appear cheaper to foreign- exporting business can sell more​

Products imported into Uk will be more expensive ​

UK firm cost increase buying products abroad.

Question 6

Interest

Answer 6

The cost of borrowing and reward for saving. Can be charged at a fixed or variable rate

Question 7

Effects on businesses of changes in interest rate:​

Answer 7

Changes in costs of a business if they have debt​

Changes in consumer spending habits (& propensity to save)​

Changes in investment decisions/growth plans​

Impacts on the exchange rate

Question 8

Possible effects on businesses of changes in the business cycle

Answer 8

Businesses output & profit related areas​

Business confidence and investment​

Employment levels​

Business start-ups and closures

Question 9

Effects of a boom

Answer 9

People feel secure in their jobs and may ​

even expect a rise/promotion​

Unemployment will be low. ​

Consumers feel confident to buy large ​

purchases and may even borrow to do so.​

Levels of borrowing will be high.​

Businesses will invest in the future –​

expansion, new machinery etc​

inflation may be high

Know at least 2

Question 10

Effects of a slump

Answer 10

Consumer confidence begins to fall.​

People are less willing to borrow.​

Businesses will be invested less.​

The number of pay rises will reduce and unemployment will rise.​

Inflation may be low.​

Interest rates may be reduced to ​

encourage spending.​

Businesses selling essentials may see sales fall or consumers downgrading. Businesses selling luxury items will be first to see sales fall. Businesses may be forced to close

Know at least 2