Th2.6: Problems with this Method of Demand Management

Question 1

What are the six problems with this method of demand management?

Answer 1

balance of trade deficit
full effect
interest rates are so low
BoE base rate
lack of confidence
discourage investment

Question 2

Balance of trade deficit

Answer 2

the exchange rate may be affected so much that exports fall significantly and imports rise significantly, causing a balance of trade deficit

Question 3

Full effect

Answer 3

changes in interest rate can take up to 2 years to have their full effect and small changes may not even affect people’s decisions

Question 4

Interest rates are so low

Answer 4

sometimes interest rates are so low they cannot be decreased any further to stimulate demand.

Question 5

BoE base rate

Answer 5

there are a range of different interest rates and not all of them are affected by the Bank of England base rate

Question 6

Lack of confidence

Answer 6

a lack of confidence in the economy may mean that, no matter how low interest rates are, consumers and businesses do not want to borrow or banks do not want to lend to them

Question 7

Discourage investment

Answer 7

high interest rates over a long period of time will discourage investment and decrease LRAS