Wider economic environment

Question 1

What are interest rates?

Answer 1

The cost of borrowing money, or the award for saving money.

Question 2

What are the effects of increasing interest rates?

Answer 2

It makes it more expensive to borrow money/ take out a loan.
This could result in a fall in spending and investment.
It also encourages savings which could result in lower profits for firms if fewer sales are made.

Question 3

What are the effects of falling interest rates?

Answer 3

Encourages taking out a loan/borrowing money.
More people will be spending and investing.
Less people will be saving, so more profits will be made, especially if sales are increased.

Question 4

What are exchange rates?

Answer 4

The value of once currency equivalent to another.

Question 5

What are the effects of a depreciated pound?

Answer 5

UK exports become more price competitive.
Export prices are reduced to increase sales.
OR
Export prices remain the same to increase profit margins.

UK imports become more expensive.
Costs of production will increase and profits will fall.
UNLESS
A fixed contract allows raw materials to be provided at a fixed rate for a period of time regardless of the exchange rate.

Question 6

What are the effects of a strong pound?

Answer 6

SPICED
Imports are cheaper.
Cost of production will fall, profits will rise.

Exports are more expensive, sales are likely to decrease.

Question 7

What are floating exchange rates?

Answer 7

Where a currency is determined by the relative supply and demand of other currencies.

Question 8

What is taxation?

Answer 8

A financial charge imposed on a taxpayer by a government to fund public expenditures.

Question 9

What are direct taxes? Give an example

Answer 9

A tax implied to the person who pays it rather than on the good/service.

E.g income tax, NI.

Question 10

What are indirect taxes? Give an example

Answer 10

A tax levied on goods/services rather than the buyer.

E.g VAT, excise duties of alcohol, cigarettes and fuel.

Question 11

What effect does a rise in indirect taxes have?

Answer 11

They increase production costs which increases market price and demand for contracts.

Question 12

What effect does a rise in indirect taxes have?

Answer 12

They increase production costs which increases market price and demand for contracts.

Question 13

What affects the demand of a currency?

Answer 13

Buying exports.
Tourism.
Hot money.
Investment.
FDI.

Question 14

What affects the supply of a currency?

Answer 14

Buying imports.
Tourism abroad.
Sale of shares/investments.
Fall in interest rates.

Question 15

What is hot money?

Answer 15

Capital frequently moved between financial institutions in an attempt to maximise interest or capital gain.

Question 16

How does inflation affect exchange rates?

Answer 16

Higher inflation in the UK in comparison to other countries reduces the value of the £ because UK goods increase in price higher than European goods so UK goods are less competitive and less demand for the £.

Question 17

What are effective exchange rates?

Answer 17

When an exchange rate is compared against a basket of currencies but weighed in favour of a main trading partner.

Question 18

Who is the UKs effective exchange rate?

Answer 18

The Eurozone and the USA.

Question 19

What is unemployment?

Answer 19

When someone is able and willing to work but does not have a payed job.

Question 20

What are the effects of a higher rate of unemployment?

Answer 20

Firms have a larger supply of labourers to employ from.
This causes wages to fall which helps firms reduce costs.

Consumers averagely have less disposable income and consumer spending falls so firms may loose profits.

A sales rise in inferior goods will be seen.

Question 21

What are the impacts of unemployment? Name 5

Answer 21

(Any 5 of the following)
Lower productivity.
Less people paying tax.
Higher gov spending.
Less consumer spending.
Increased street crime.
Higher drugs/alcohol use.
Increased teen pregnancy.
Higher obesity levels.
Increase in black market trades.

Question 22

What is inflation?

Answer 22

The general rise in prices over time.

Question 23

How does inflation link to interest rates?

Answer 23

When inflation is high, interest rates are likely to be high and so the cost of investment will increase. Firms are less likely to invest.

Question 24

How does inflation affect firms?

Answer 24

Workers may be demanding a higher wage as their real wages are decreasing, this increases costs for the firm forcing them to put prices up, further contributing to inflation.

Question 25

How does unpredictable inflation affect firms?

Answer 25

It may reduce their confidence as costs and future predictions are uneasy to calculate.