economic influences - interest rates

Question 1

define interest rates

Answer 1

Cost of borrowing money

Businesses pay more back than they borrowed when taking out a loan

Question 2

what does the bank of England do to interest rates in a boom and recession?

Answer 2

• Raise interest rates during boom/peak of economic cycle

- Lower interest rates during recessions / troughs

Question 3

government spending + taxation

Answer 3

• Businesses need to monitor what Government do in relation to taxation and spending (known as fiscal policy) due to the impact it might have on them
• A decrease in tax and/or an increase in government spending can lead to the creation of extra income/spending that benefits a business
• An increase in tax and/or a decrease in government spending takes money out of the economy and therefore negatively affects a business

Question 4

what happens when interest rates increase?

Answer 4

• Consumers save more
• Consumers have less disposable income due to higher repayments on debt = lower spending
• Business costs like mortgages and loans go up so profit is squeezed
• Borrowing is more expensive so fewer loans are taken out to use for investment (i.e. new capital) = long term impact on productivity and efficiency

Question 5

what happens when interest rates decrease?

Answer 5

• Consumers spend more (saving is less desirable)
• Consumers have more disposable income due to lower repayments on debt = increased spending
• Business costs like mortgages and loans go down so profit can go up
• Borrowing is less expensive so more loans are taken out to use for investment (i.e. new capital