Chapter 24 Continuation

Question 1

What are responses may a business have to a increase in import tariffs/custom duty?

Answer 1

• Businesses may decide to use local raw materials which may be cheaper, but quality may suffer as a result
• Local firms may set up more branches and expand

Question 2

What is sales tax?

Answer 2

The tax paid by consumers on the purchase of some items.

Question 3

What is excise duty?

Answer 3

The tax paid by a manufacturer on the production of specific goods within the country.

Question 4

What is government borrowing?

Answer 4

• Tax rates can only be altered to a certain extent
• Governments also borrow money from the public in order to fund their spending
• Can be borrowed locally by issuing treasury bills and bonds, which people and organisations of the country invest in
• They can borrow from other countries but may be expensive

Question 5

What’s the difference between treasury bills and bonds?

Answer 5

Treasury bills are short-term investments, with a maturity between a few weeks to a year from the time of purchase.

Treasury bonds are more varied and are longer-term investments that are held for more than a year.

Question 6

How do businesses respond to an increase in government spending?

Answer 6

• The government can affect economic growth by controlling its own spending
• If growth is slow, then the government can increase its spending in areas such as schools, hospitals and transportation
• Jobs will increase in these sectors + other dependent ones
• E.g. if the government spends more on roads, then construction firms that build and repair the road network will benefit (people will be needed to
• This will encourage businesses to think about growth

Question 7

How do businesses respond to an decrease in government spending?

Answer 7

• This can discourage businesses from expansion
• Less jobs available

Question 8

What is monetary policy?

Answer 8

Monetary policy is how a country’s government or central bank controls how much money there is in circulation. The government or central bank uses interest rates to maintain economic growth and keep inflation low.

Question 9

What do interest rates determine?

Answer 9

• The money that an individual or a financial organisation can gain when they deposit money with a bank
• The cost of borrowing money from a bank

Question 10

How does an increase in interest rates affect consumers?

Answer 10

• Cost of borrowing increases, thus people will borrow less
• More incentive to save so they will spend less

Question 11

How does an increase in interest rates affect businesses?

Answer 11

• Credit/cost of borrowing is more expensive; interest costs rise
• With people spending less, business sales will drop

Question 12

How does an increase in interest rates affect a business’s response?

Answer 12

Firms may delay or cancel their plans to expands as the costs of borrowing money is high.

Question 13

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

Answer 13

• Reduced business activity leading to slow economic growth
• High rate of return from savings will encourage individuals and financial institutions from other countries to invest their money with the banks in that country
• This strengthens the national currency and leads to exchange rate appreciation
• Imports become cheaper

Question 14

What types of businesses are usually affected the most by changes in taxation and interest rates?

Answer 14

Businesses that produce non-essential/luxury goods and services such as the tourism industry.

Question 15

What types of businesses are usually affected the least by changes in taxation and interest rates?

Answer 15

Businesses that produce essential goods and services as people can’t do without essential goods and have to buy them no matter how expensive they are.