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INTEREST RATES:
COST OF BORRWOING MONEY OR THE RETURN FOR
INVESTING MONEY
The BASE RATE:
In the UK economy is set
by the BANK OF
ENGLAND.
Each month the
MONETARY POLICY
COMMITTEE of TBE
decide what the base
rate should be.
DARIA WARDA SECTION 5 2015…read more

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MONETARY POLICY involves the use of interest rates and
other monetary measures to:
o Influence bank leading
o Control the growing of aggregate demand
o Control the demand for and supply of money
o Influence the external value of the currency
The BOE operates UK monetary policy on behalf of the
government DARIA WARDA SECTION 5 2015
OBJ: Price Stability and the main weapon is the interest rate(s)…read more

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CHANGES IN INTEREST RATES:
DARIA WARDA SECTION 5 2015…read more

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EXCHANGE RATES:
THE RATE AT WHICH ONE CURRANCY CAN BE
EXCHANGED FOR ANOTHER I.E. £1 BUYS $1.60
EFFECTS OF EXCHANGE RATE
CHANGES:
A rise in the value of a currency is termed
appreciation; a decline in its value is called
depreciation. MAIN REASON: so that
businesses can pay for
Price elasticity-if overseas demand for the product is
goods and services
price-inelastic, then an increase in the exchange rate
bought from overseas.
may not be too harmful.
Demand may arise
The exchange rate of £ Prices of UK exports Prices of imported goods in because individuals and
overseas in foreign the UK in pounds
businesses wish to invest
currencies
in enterprises overseas.
Appreciates (rises) Increase Fall
Depreciates (falls) Fall Increase
DARIA WARDA SECTION 5 2015…read more

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How might firms respond to a rising value of the £? How might UK firms respond to a falling value of the £?
EXPORTERS EXPORTERS
Allow price to rise in foreign markets reducing probable sales. Allow prices to fall in overseas markets as a result of the exchange
rate change. They will receive the same amount in pounds from each
Leave prices unchanged in overseas markets. Sales should be side but should achieve higher sales.
unchanged but the exporter will receive fewer pounds form each sale
Increase their prices to maintain price levels in term of the foreign
currency. Sales should remain constant and revenue should rise in
pounds as a result
DOMESTIC PRODUCERS DOMNESTIC PRODUCERS
Reduce prices to compete with cheaper imports. Enjoy the benefits Enjoy increased sales as a result of rising prices of competitors'
of cheaper imports of materials and components. imported products, assuming foreign businesses do not hold prices
down.
Emphasise other elements in the marketing mix, for example the
quality of the product. Increase prices to enjoy increased revenues from each sale.
Beware the increased cost of imported raw materials and
components.
DARIA WARDA SECTION 5 2015…read more

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