Interest and Inflation Rates
- Created by: lewis.mackk05
- Created on: 29-10-22 10:57
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- 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
- 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.
- 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
- Interest Rates
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