2.5.1 Economic Influences

Question 1

define inflation

Answer 1

the general rise in prices in an economy over time

Question 2

define deflation

Answer 2

overall decrease in the price of goods and services overtime

Question 3

how can inflation be tracked

Answer 3

• inflation can be tracked using the consumer price index (CPI)
• it tracks the changes in prices of hundreds of goods and services that an average household would regularly buy using inexes

Question 4

what is the rate of inflation

Answer 4

the percentage change in the price of goods and services in one year compared to another

Question 5

name and explain the two types of inflation

Answer 5

1 demand pull- when demand is too high for businesses to meet they raise their prices
2 cost-push- rising costs push prices higher

Question 6

If inflation is high in the UK, UK businesses may be less competitive globally

Answer 6

• this is because exports to other countries will be more expensive so they are less price competitive

Question 7

what are problems for a business caused by inflation

Answer 7

X increased costs, workers demand higher pay, suppliers increase prices, utilities are more expensive
X interest rates rise
X reduces international competitiveness
X hard to plan and forecast

Question 8

what are interest rates

Answer 8

• determine the costs of borrowing and the return on savings

Question 9

what are the two reasons why rising interest rates reduce demand

Answer 9

• high interest rates mean people have higher outgoings if they are paying back borrowed money, this leaves people with lower disposable income to spend
• high interest rates encourage saving and discourage spending

Question 10

products that require borrowing (houses cars etc.) are _____ likely to be affected by interest rates.

Answer 10

more

Question 11

bank of England base interest rates tend to influence interest rates nationally

Answer 11

-

Question 12

what are exchange rates

Answer 12

• determine the value of one currency compared to another

Question 13

what are the reasons for fluctuating exchange rates

Answer 13

• changing demand for a currency
• interest rates
• economic growth

Question 14

what does appreciation mean

Answer 14

• the value of one currency has increased when compared to another
• it has strengthened

Question 15

what does depreciation mean

Answer 15

• a decrease in the value of one currency compared to another
• it has weakened

Question 16

how does appreciation affect exporting businesses

Answer 16

• sales are likely to fall as products are more expensive compared to overseas competitors
• businesses may need to lower prices and sacrifice profit margins

Question 17

how does appreciation affect importing businesses

Answer 17

• costs are lower from overseas suppliers
• a business may then want to expand overseas suppliers

Question 18

how does depreciation affect and exporting business

Answer 18

• sales are likely to rise as prices are lower than competitors
• businesses may increase their prices

Question 19

how does depreciation affect importing businesses

Answer 19

• costs are likely to rise from overseas suppliers
• business may seek domestic suppliers

Question 20

NOTE: some businesses may rely on both exporting and importing so appreciation or depreciation of the pound is never solely good. Businesses may prefer to have stable exchange rates so that they can easily forecast and set objectives.

Answer 20

-

Question 21

you need to know how to convert currencies in the exam

Answer 21

-

Question 22

how does government spending influence the economy

Answer 22

• governments offer benefits which allow poeple to either spend more or less
• construction of infrastructure could improve supply routes, or could increase customer access and increase demand

Question 23

what is the difference between direct and indirect taxes

Answer 23

direct- taxes levied on income
indirect- taxes levied on spending

Question 24

if taxes increase what is the impact on the business

Answer 24

• revenue may fall as customers have less disposable income to pay for goods
• operating costs rise
• business may choose to relocate or size down
• increased profit mean business spending and investment may need to be pulled back

Question 25

what is the business cycle

Answer 25

• this is the upturns and downturns in the level of a country’s economic activity (GDP) over time

Question 26

what is a recession

Answer 26

• when an economy experiences two consectutive quarters or more of negative economic growth

Question 27

what is a boom

Answer 27

• a period of time when the economy experiences increasing/high rates of economic growth

Question 28

what are the 4 characteristics of a recession

Answer 28

• high unemployment
• low confidence, no risk taking or spending
• low inflation, less spending
• increased government spending

Question 29

what is economic uncertainty

Answer 29

• when it is difficult tot forecast the level of supply and demand in an economy

Question 30

why might economic uncertainty occur

Answer 30

• fluctuating exchange rates
• fluctuating prices of key commodities like oil
• changes in legislation
• change in government

Question 31

what may a business do to counteract uncertainty

Answer 31

• building up cash reserves (emergency funds)
• being ready to take opportunities when they arise
• keeping informed about the economic climate