6.1 - Economic Issues

Question 1

4 main stages of the business cycle and what happens during them

Answer 1

• growth - GDP rises and unemployment falls
• boom - GDP is high. unemployment low so increased demand for goods and services. business will want to increase output but struggle to find employees.
• recession - GDP falling, unemployment high, businesses face lower demand
• slump - GDP falling greatly, high levels of unemployment, demand is low. business struggles to survive

Question 2

impact on a business of unemployment

Answer 2

if unemployment is high, peoples income levels are lower, demand for goods and services decrease. however it is easier to recruit employees

Question 3

4 economic objectives of the government

Answer 3

• low inflation
• low unemployment
• economic growth
• balance of payments

Question 4

3 ways the government can influence the economy

Answer 4

• changing taxes (fiscal policy)
• changing government spending (fiscal policy)
• changing interest rates (monetary policy)

Question 5

what is fiscal policy

Answer 5

changing tax rates

Question 6

4 taxes in fiscal policy and how they influence economy

Answer 6

• income tax - if this increases, public has less disposable income, reducing demand for firms
• corporation tax - tax on business’ profit. if this increases, business has less profit after tax so less retained profit. also means less dividends for shareholders.
• indirect taxes - tax on goods and services. If this increases, goods and services are more expensive, so demand decreases for firms UNLESS the good is price inelastic. If everything is now more expensive employees may try to negotiate higher wages, increasing costs for a firm.
• increasing tariffs - tariffs are a tax on imports. If these increase, businesses raw materials may be more expensive IF they import them. If their competitors are overseas, their competitors goods now will be more expensive to import, leading to an increase in sales for domestic firms.

Question 7

what is monetary policy

Answer 7

interest rates, which are costs of borrowing money set by the government

Question 8

4 impacts of an increase of interest rates

Answer 8

• firms with existing loans have to pay more money on interest, increasing their fixed costs. ​
• if consumers have taken out mortgages, their monthly interest repayments will be higher, leading to less disposable income, leading to lower demand for goods and services.​
• consumers will be less likely to borrow money as interest rates are high, and so consumers will have less money available to buy luxury goods and services​
• managers thinking about borrowing money to expand may delay their decision. Resulting in less chance of expansion for a business. ​
  ​

Question 9

2 ways businesses may respond to increase in taxes

Answer 9

• reduce product prices so they are more affordable for consumers ​
• find cheaper suppliers so can reduce prices of products and still maintain profit

Question 10

one way businesses may react to increase tariffs on imports

Answer 10

Find domestic suppliers instead of overseas suppliers

Question 11

3 ways businesses may react to increased interest rates

Answer 11

• develop and produce cheaper goods so that consumers can afford them ​
  -delay investments as the cost of borrowing is too high ​
• sell shares instead of taking a bank loan as a source of finance

Question 12

1 way businesses may react to increased government spending

Answer 12

Switch marketing strategy to gain more Government contracts e.g. building or equipping schools and hospitals