Chapter-24

Question 1

What is meant by the term ‘balance of payments’?

Answer 1

The balance of payments is the difference between the value of a country’s exports and imports of goods and services over a year.

Question 2

What are the four main stages of the business cycle?

Answer 2

i) Growth

ii) Boom

iii) Recession

iv) Slump

Question 3

What are the key characteristics of the growth stage in the business cycle?

Answer 3

i) Positive outlook for new businesses

ii) Existing businesses grow and make profits

iii) Rise in GDP (economic activity)

iv) Falling unemployment

v) Higher standards of living due to more employment

Question 4

What are the key characteristics of the boom stage in the business cycle?

Answer 4

i) Business investments and profits are at their highest

ii) Most sectors are performing at their best

iii) High demand causes prices to rise (inflation)

iv) Very low unemployment

v) Businesses face increased wage costs and skilled labour shortages

Question 5

What are the key characteristics of the slump stage in the business cycle?

Answer 5

i) Very low business confidence with little to no investment

ii) Low production of goods and services; many businesses close

iii) Low consumer demand

iv) High unemployment due to reduced business activity

Question 6

What is an interest rate?

Answer 6

It is the cost to a person or business of borrowing money from a lender, such as a bank.

Question 7

What is a tax?

Answer 7

A charge or fee paid to the government on income, goods, and services.

Question 8

What is a direct tax?

Answer 8

A tax charged on personal income or on the profit made by a business.

Question 9

What is an indirect tax?

Answer 9

A tax charged on the price of goods and services, added before the goods and services are bought.

Question 10

What is disposable income?

Answer 10

The amount of income left for individuals after taxes have been paid.

Question 11

What do value added tax (VAT), import tariffs/customs duty, sales tax, and excise duty have in common?

Answer 11

They are all types of indirect taxes used by governments around the world to raise revenue.

Question 12

What is the purpose of VAT, import tariffs, sales tax, and excise duty?

Answer 12

Their main purpose is to generate income for the government by taxing goods and services.

Question 13

What is the effect of an increase in VAT or sales tax on consumers, businesses, and how might businesses respond?

Answer 13

i) Effect on consumers: Goods and services become more expensive, leading to a fall in demand.

ii) Effect on businesses: Sales decrease as customers buy less.

iii) Business response: Businesses may reduce production and try to become more competitive on price.

Question 14

What is the effect of an increase in import tariffs/customs duty on consumers, businesses, and how might businesses respond?

Answer 14

1) Effect on consumers:

i) Imported goods and goods made with imported raw materials become more expensive, leading to higher prices for consumers.

2) Effect on businesses:

i) Businesses selling imported goods may experience lower sales.

ii) The increased cost of imported raw materials raises the cost of production.

iii) Local businesses may benefit from increased demand as consumers turn to domestically produced goods.

3) Business response:

i) Businesses might switch to using local raw materials, even if the quality suffers, in order to cut costs.

ii) Local firms may expand and open more branches to meet the rising demand.

Question 15

Q: What do interest rates determine?

Answer 15

The money that an individual or a financial organization can gain when they deposit money with a bank.

Question 16

What are the effects of an increase in interest rates on consumers, businesses, and their responses?

Answer 16

1) Effect on consumers:

i) Cost of borrowing increases, leading to less borrowing.

ii) More incentive to save, thus reducing spending.

2) Effect on businesses:

i) Credit/cost of borrowing becomes more expensive; interest costs rise.

ii) With reduced consumer spending, business sales may drop.

3) Business response:

i) Firms may delay or cancel expansion plans due to the high cost of borrowing.

Question 17

What are the long-term effects of an increase in interest rates on the economy?

Answer 17

i) Reduced business activity leading to slow economic growth, as the cost of borrowing rises and businesses may scale back or delay investments.

ii) High rate of return from savings encourages individuals and financial institutions from other countries to invest in the country’s banks, leading to:
strengthening of the national currency.

iiI) Exchange rate appreciation.

iv) Imports becoming cheaper due to the stronger currency.