2.5.1 Economic influences Flashcards
What is inflation?
The general rise in prices in an economy over time.
2% inflation is the goal for the UK government.
What does the consumer price index measure?
Monthly changes in the prices of a range of goods and services and compares changes to earlier periods.
List some problems caused by inflation.
- Increased costs
- Higher repayments on loans
- Changes in consumer spending habits
- Reduced international competitiveness
- Uncertainty
What is an exchange rate?
The value of one currency expressed in terms of another.
What factors cause fluctuations in exchange rates?
- Changing demand for a currency
- Economic growth
- Changes to interest rates
What is the impact of currency appreciation on exporting businesses?
Sales are likely to fall as products become more expensive.
What may exporting businesses need to do if currency appreciates?
Lower prices to remain competitive.
What is the impact of currency appreciation on importing businesses?
Costs are likely to fall as supplies from overseas become cheaper.
What is the interest rate?
The percentage reward offered for saving money and the percentage charged for borrowing money.
What happens if interest rates rise?
- Businesses pay more on new or variable rate borrowing
- Increased costs may lead to less willingness to make capital investments
- Customers less likely to purchase on credit
- Overseas demand may fall
What are direct taxes?
Taxes levied on income.
How does an increase in income tax affect revenue and demand?
- Revenue: Increase in income tax will reduce disposable income of customers.
- Demand: Less disposable income leads to less demand.
What are indirect taxes?
Taxes levied on spending.
What is the business cycle?
The upturns and downturns in the level of a country’s economic activity over time.
What characterizes a recession?
- Negative economic growth
- Increasing unemployment
- Low confidence for households
- Deflation
What are some impacts of a boom?
- Decreasing unemployment
- High confidence
- Increasing inflation
- Decreased government spending
What happens to business decisions during a recession?
Low confidence may delay decisions and lead to low production levels.
Fill in the blank: The government imposes _______ on businesses and households.
[direct and indirect taxes]
