PESTEC- Economic

Question 1

What are the 3 stages of the economic cycle?

Answer 1

Boom
Recession
Recovery

Question 2

What’s a boom?

Answer 2

GDP and employment levels are very high.

Demand for products is high.

Question 3

What impact does a boom have on a business?

Answer 3

Businesses can take advantage of the demand for products and the wealth of consumers by increasing prices. This will improve profits for the business.

However, a side effect is an increase in inflation. This is a rise in prices over time often leads to wage rises, so people can afford to keep up with inflation.

Question 4

What’s recession?

Answer 4

GDP and employment levels fall.

Demand for products falls.

Question 5

What impact does a recession have on a business?

Answer 5

Businesses have to react to a falling demand by making staff redundant, which will cost them redundancy payments and lose them the skills and knowledge of employees.

Prices will have to be cut to try and increase demand, which will lower the amount of profit a business can make and may even lead to losses.

Question 6

What’s recovery?

Answer 6

GDP and employment levels begin to rise.

Demand for products increases.

Question 7

What impact does a recovery have on a business?

Answer 7

Businesses can rely on consumers being in a better position to spend money due to rising employment, so therefore sales will increase.

Businesses can develop new products and start to increase prices, which will lead to bigger profits for the business.

Question 8

What are the 2 economic policies?

Answer 8

Fiscal policy
Monetary policy

Question 9

What is a fiscal policy?

Answer 9

A government’s fiscal policy concerns the tax rates it sets and its level of public spending.

Question 10

What is a monetary policy?

Answer 10

A government’s monetary policy is the ways in which it controls the supply of money into the economy and therefore affects spending. This can be done by varying interest rates.

Question 11

What are the 2 economic factors?

Answer 11

Interest rates
Exchange rates

Question 12

What’s the effect of a rise in interest rates on savings?

Answer 12

Customers are more likely to save due to attractive rates as they will earn more money on their savings. This means customers will spend less on businesses’ products as they are saving their money instead.

Question 13

What’s the effect of a rise in interest rates on borrowing?

Answer 13

Customers are less likely, or able, to take out loans or to spend using credit cards as they will have to pay back more money on their borrowing. This means customers will be able to spend less on businesses’ products.

Question 14

What’s the effect of a reduction in interest rates on savings?

Answer 14

Customers are less likely to save as interest rates are unattractive, so are more likely to spend money on businesses’ products.

Question 15

What’s the effect of a reduction in interest rates on borrowing?

Answer 15

Customers are more likely to borrow money as it is less expensive to pay back loans and credit card debts, so are more likely to spend money on businesses’ products.

Question 16

What’s the effect of a strong pound on exports?

Answer 16

If the value of the pound is high compared to foreign currencies, UK exporters will struggle to sell their products abroad as they will be more expensive than foreign goods and sales will fall.

Question 17

What’s the effect of a strong pound on imports?

Answer 17

If the value of the pound is high compared to foreign currencies, imports will become cheaper. This will decrease costs for businesses that source materials from abroad which will increase their profits.
It will also allow a lower selling prices to be charged for products made in the UK to attract customers.

Question 18

What’s the effect of a weak pound on exports?

Answer 18

If the value of the pound is lower compared to foreign currencies, UK exporters will be able to sell more goods to foreign countries as their goods will be less expensive for customers outside the UK.

Question 19

What’s the effect of a weak pound on imports?

Answer 19

If the value of the pound is low compared to foreign currencies, imports will become more expensive. This will increase costs for the businesses that source their materials from abroad and may lead to an increase in prices.