2.5.1 - External Influences

Question 1

Def inflation

Answer 1

The percentage rate at which average prices rise during a year within the whole UK economy

Question 2

3 circumstances when inflation has a major effect

Answer 2

• when inflation rates are sig above 2%
• when prices are rising faster than average earnings
• when UK inflation is higher than that in most other countries

Question 3

Positive of inflation

Answer 3

Firms may be able to increase their selling prices to project their profit margins

Question 4

Positive impacts of high inflation

Answer 4

• industry wide price enables revenues to grow leading to higher gross profit
• makes using debt cheaper - inflation erodes real value of existing debts
• could be cause by higher consumer demand in the economy, before costs start to rise this could increase profit margins

Question 5

Negative impacts of high inflation

Answer 5

• costs of raw materials rise, increase prices, decrease competitiveness
• so businesses have contracts at fixed prices meaning can’t increase prices
• rising inflation associated with higher interest rates - reducing economic growth

Question 6

Def exchange rate

Answer 6

Is the value of one currency expressed in terms of another

Question 7

As the pound appreciates

Answer 7

• UK exports get more expensive so sales volumes slips

- imports to UK get cheaper making it harder for firms to compete

Question 8

What happens when the pound depreciates

Answer 8

• as UK exports get cheaper, the sales volumes rise

- imports get more expensive so UK firms can compete more effectively

Question 9

Acronym SPICED

Answer 9

Strong pound imports cheaper exports dearer

Question 10

Def interest rate

Answer 10

Is the reward for saving and the cost of borrowing expressed as a percentage of the money saved or borrowed

Question 11

When interest rates go up, businesses are disadvantages in 4 ways

Answer 11

• interest on saving goes up, people save rather than spend
• business costs of debt repayment will rise
• the amount consumers may on loans/ credit cards goes up
• consumers have less money to spend on goods

Question 12

If interests go down, 4 ways businesses benefit

Answer 12

• the amount consumers pay on loans/ credit cards goes down
• the interest on saving goes down, people more likely to spend
• consumers have more money to spend on goods
• business costs of debt repayment will fall

Question 13

Why do governments change levels of taxation and government spending

Answer 13

To manage the economy, create stable economic growth

Question 14

2 ways government help to reduce the level of unemployment

Answer 14

• extra spending on road-building, health and other services
• reduce income tax to enable families to spend more of the money they earn

Question 15

2 things government does to cut the growth rate when it is rising too fast

Answer 15

• cut spending on health, education to take spending from economy
• increase income tax to force people to think harder and more carefully about what they buy

Question 16

2 things government does to improve competitiveness of British firms

Answer 16

• extra spending on education

- cut company taxation

Question 17

2 things government does to cut the rate of imports, especially of consumer goods

Answer 17

• cut benefits to reduce people ability to buy exports

- increase VAT in all goods other than food and drinnk

Question 18

Effect of business cycle on businesses dependant on

Answer 18

Price elasticity of demand

Question 19

4 stages of a business cycle

Answer 19

Boom, recession, depression and recovery

Question 20

Description of boom

Answer 20

• high levels of consumer spending
• prices and costs tend to rise faster
• low unemployment

Question 21

Description recession

Answer 21

• falling levels of consuming spending and confidence means lower profits for businesses

Question 22

Description of depression

Answer 22

• very weak consumer spending and business investment

- many businesses fail, rapidly rising unemployment

Question 23

Description recovery

Answer 23

Things start to get better, consumers begin to increase spending, business starts to invest again

Question 24

Ideal economy

Answer 24

Economic stability to the uncertainty that comes with cyclical economic growth

Question 25

Why do directors warn economic stability

Answer 25

To be sure the money they spend will be recovered and generate a profit