BUSINESS - 2.5.1 part 2 - ECONOMIC INFLUENCES - INTEREST RATES

affect of interest rates on borrowing and saving

low interes rates = good for borrowing, bad for saving

high interest rates = bad for borrowing , good for saving

what are interest rates

The cost of borrowing and the money gained from saving

who sets interest rates, how do they decide

- interest rates are set by the bank of england

- will raise interest rates if inflation is high (put off borrowing - encourage saving)

- will lower them if they want to stimulate the economy and encourage spending

how do rising interest rates affect businesses

- demand will likely fall as consumer spending will decrease

- consumer spending falls as borrowing becomes more expensive

- mortages will become more costly , may reduce disposable incomes

- costs will rise if business has debts , repayments more expensive

how do lower interest rates affect businesses

- cheaper borrowing cost, incentivises expansion such as new equipment , technology or hiring additional staff

- especialy beneficial for small businesses/ startups as these firms often rely on loans initially

- increased consumer spending as borrowing cheaper,particulary benefits firms selling price elastic or luxury goods

- however may lead to inflation over time (demand pull)

- low interest rates often lead to weaker currency , exports cheaper, imports more expensive

what affect does high interest rates have on exchange rates

high interest rates will attract overseas investors as they would see a better return

- this would lead to an increased demand for pounds , therefore increasing the exchange rate (strength of pound)\

- this would make imports cheaper and exports more expensive

what is taxation

Taxation is the process by which governments collect financial contributions from individuals, businesses, or other entities to fund government spending

what taxes must businesses pay

- corporation tax a tax of 19 or 25% on net profits

- VAT a sales tax of 20%, often passed onto the consumer (ped)

- business rates = council tax for business

- national insurance

- taxes on imports

what effect will a cut in gov spending have on businesses

- reduction in demand, cut in welfare means less income to spend

- gov spending includes grants and subsidies for busineses, fall in spending would harm businesses benefiting from such schemes

what is the business cycle

a cycle or series of cycles of economic expansion and contraction. Measure by quarterly changes to GDP

what are the 4 stages in a business cycle

- peak

- recession

- trough

- expansion

what happens at the peak in a business cycle

- economy operating at maximum output

- high demand, high revenue

- however inflation (demand pull) and wages likely to rise

whats is happening in a recession in a business cycle

- consumer spending drops

- GDP shrinks

- revenues fall leading to businesses making redundancies

what is happening during expansion in the business cycle

demand begins to rise, GDP rises

- unemployment decreases as businesses higher more to meet demand

- businesses wil invest more

what is happening in a trough in the business cycle

- spending is at its lowest , unemployment high

- labour/resources are cheap ,interest rates low, so some business may capaitalise on this and rise

how does economic uncertainty affect businesses

- demand for goods and services fall as people are more cautious with their spending

- due to a fall in spending , businesses are reluctant to expand