Economic influences Flashcards
define interest rates
The cost of borrowing and the return on savings
what affect does a fall in interest rates have on a business?
they will have a decrease in the cost of borrowing
what affect does a rise in interest rates have on a business?
They will have an increase in the cost of borrowing
A change in interest rates will affect who?
Businesses and individuals who have debt to pay off, such as loans or mortgages.
What affect can high interest rates have on the economy?
- less disposable income for consumers (who have borrowed money)
- Fall in demand
- Higher incentive to save
- Fall in consumer spending
What affect can low interest rates have on the economy?
- More disposable income (for people who have borrowed)
- Incentive to spend
- Increase in demand
What effect will interest rates have on demand for goods?
It depends on the elasticity of the product and the nature of the good.
Define inflation
A general increase in the price of goods and services in a time period.
What is demand pull inflation and when does it happen?
Inflation when there is too much demand for goods and services, this happens when there is an increase in disposable income.
What is cost push inflation?
When rising costs push up prices.
What will happen if wages, pensions and benefits don’t rise with inflation?
There will be a fall in spending as consumers will have less disposable income.
What affect does inflation have on exports?
High inflation in the UK will make UK exports more expensive abroad which will reduce competitiveness of UK exports.
Low inflation in the UK will make UK businesses exporting goods more competitive.
How is inflation measured?
using the Consumer Price Index which is a ‘basket’ of hundreds of goods and services that an average household would buy regularly.
How can you work out the Index number?
Average value of basket / base value of basket x 100
What goods are most likely going to be affected by inflation?
Luxury goods because demand for them usually falls if people have less income.
define exchange rates
The price of one currency expressed in another.
What will happen if the £ appreciates?
SPICED
What will happen if the £ depreciates?
WPIDEC
What are 3 types of government spending?
Infrastructure, human capital and physical capital
Identify some features of a boom
- High profits
- Low unemployment
Identify some features of a recession
- consumer and business confidence falls
- Production and demand falls
Identify some features of a slump
- High unemployment
- High rates of business closure and failure
Identify some features of a recovery
- Increasing consumer confidence
- Businesses start to invest
Define economic uncertainty
Economic uncertainty is where firms and consumers are unable to predict their future sales or incomes.
What are some examples of microeconomic uncertainty?
- A new competitor entering the market
- A shortage in raw materials
What are some examples of macroeconomic uncertainty?
- A change in government
- Leaving a trade union
- Changes to legislation
