Interest Rates

Question 1

Interest Rates

Answer 1

Interest rates are charged by banks and other financial institutions for borrowing.  when they are high the costs of loans increase and the demand for loans fall.

Question 2

Inflation

Answer 2

The general rise in consumer prices over time. Rising inflation suggests rising prices in economy.

Question 3

Unemployment

Answer 3

During recession, unemployment rises.  Sales forecasts are reduced when too many people are unemployed and stop spending as much which businesses suffer from because of lack of sales.

Question 4

Exchange rates

Answer 4

This reflects value of one currency in terms of another. E.g. if £1 = $1.45, it’s cheaper for the UK to purchase goods and services from the US.

Question 5

Effects of interest rates on costs

Answer 5

It will increase costs because higher interest on borrowing. 

Question 6

Effects of interest rates on investment

Answer 6

Changes the amount businesses invest because of:

• cost of loans
• paying off existing loans
• a in demand

Question 7

Effects of interest rates on demand

Answer 7

Decrease in demand because people will want to decrease spending as their mortgages will increase and they’ll have less disposable income.