Financial Management Environment (2) Flashcards
What do interest rate changes brought about by government polciy affect?
The borrowing costs of businesses
What do increases in interest rate man
Fewer investments show positive returns, deterring companies from borrowing to finance expansion
What do increases in interest rate exert?
A downward pressure on share prices, making it more difficult for companies to raise monies from new share issues
How are businesses indirectly affected by a monetary policy?
By decreases in consumer demand that result from increases in interest rates
What do exchange rate changes broughout about by government policy affect?
Value of sales revenue and costs that are in a foreign currency
What do fluctuating exchange rates create?
Uncertainties for businesses involved in international trade
What may resolve uncertainties in exchange rate policy?
A fixed exchange rate policy
Impact of a lower exchange rate (domestic goods)
Domestic goods are cheaper in foreign markets so demand for exports increases
Impact of a lower exchange rate (foreign)
Foreign goods are more expnesive so demand for imports falls
Impact of a lower exchange rate (production costs)
Improted raw materials are more expensive which increases production costs
Impact of a higher exchange rate (domestic goods)
Domestic goods are more expensive in foreign marekts so demand for exports falls
Impact of a lower exchange rate (foreign)
Foreign goods are cheaper so demand for imports rises
Impact of a lower exchange rate (production costs)
Improted raw materials are cheaper so costs of production fall
What is market failure?
Occurs when marekt meachanism fails to work efficiently and therefore outcome is sub-optimal
What is meant by imperfect competition?
Where one company’s large market share is leading to inefficiency or excessive profits
