Interest and Inflation Rates

View mindmap
  • Interest and Inflation Rates
    • Interest Rates
      • Interest Rates tell you the cost of borrowing or the return on savings and they determine the cost of borrowing or saving
      • Changes in interest rates will affect a businesses costs if it has a loan or mortgage
      • Interest rates also affect consumer spending, and therefore businesses.
        • High Interest rates means consumers have less disposable income and so market demand goes down, and Vice Versa.
      • The Bank of England base rate influences the other banks interest rates (although banks can choose to set the interest rate higher or lower than the base rate)/
      • The effect of interest rates on demand depends on the product. Products that often require borrowing e.g. cars are quite sensitive to interest rates changes
        • When interest rates go up significantly firms can change strategy ad diversify away from these products into cheaper ones.
    • Inflation
      • Inflation is an overall increase in the price of goods and services within an economy and can happen because demand or costs for a business rise
      • The 2 Types of Inflation
        • Demand-Pull Inflation is when there is too much demand
        • Cost-Push inflation is when rising costs push up prices
      • The rate of inflation is the percentage change in the price of goods and services within an economy, in one year compared to the previous year
      • Expectations of inflation can make inflation worse. A business which expects its suppliers to put their price up will put its own prices up to cover the expectation of increased costs.
        • This can cause a higher wage demand, which means further increased labour costs. As wages go up, there is an increasde i  demand as people can afford more, which causes prices to go up.
          • Leading to a wage spiral- a big cause of cost push  inflation
      • When inflation is high, spending goes up temporarily-people rush to buy more before prices go up further, if wages don't go up in line with inflation then spending goes down
      • When inflation is high in the UK it makes exports expensive abroad, meaning UK businesses lose global competitiveness. When inflation in the UK is low businesses have a greater global competitive advantage
      • Inflation that's too high=bad for the economy
        • By changing the base rate the Bank of England try and keep inflation rates within a set range
      • Deflation is an overall decrease in the price of goods and services within an economy- opposite of inflation and causes a fall in productivity


No comments have yet been made

Similar Business Studies resources:

See all Business Studies resources »See all Theme 2 (External Influences) resources »