Theme 2 AO3

Question 1

How does changing interest rates affect inflation

Answer 1

Increase interests rates > Less borrowing and investment > Less consumption > prices fall

Question 2

How does inflation impact businesses?

Answer 2

Business uncertainty will be higher and businesses will delay investments due to volatile prices

Question 3

How does inflation impact businesses? (2)

Answer 3

Businesses will be less internationally competitive as they will have to charge higher prices to account for their rising costs

Question 4

How does inflation affect consumers who borrow?

Answer 4

Borrowers will gain from inflation as interest rates will be lower during inflation periods

Question 5

How does inflation affect consumers?

Answer 5

Higher inflation > less purchasing power of currency > lower living standards

Question 6

How does inflation affect savers?

Answer 6

Savers lose out because the value of their savings will decrease and investing would be a better option as interest rates are lower

Question 7

How does rising exports affect an economy?

Answer 7

Rising exports > increased net trade > increased AD

Question 8

Gov decides to increase income tax to reduce the current account deficit. Explain.

Answer 8

Increased income tax > Less household spending > less demand for imports > Greater net trade value > less deficit.

Question 9

The UK gov imposes a tariff on all imports. What happens?

Answer 9

Tariff imposed > imports become more expensive > less demand for imports > less goods imported > increase in net trade/ current account.

Question 10

Asses the impacts of low interest rates on an economy.

Answer 10

Lower interest rates > cheaper to borrow > businesses increase investments > greater AD > Economic growth.