Interest & Exchange Rates

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1. Interest rates are most likely to be cut when the economy is:

  • Entering a recession
  • Experiencing much lower employment
  • Enjoying a boom
  • Experiencing high inflation
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2. A business is most likely to be badly affected by a rise in interest rates if it has:

  • High cash balances
  • High borrowings at a variable rate
  • High borrowings at fixed a rate
  • High fixed costs

3. What is meant by a fixed interest rate?

  • An interest rate which will not change at whatsoever over the life of a loan
  • An interest rate which can flucuate
  • A tax paid by tradesmen
  • Interest rates will only change if the prime minister says they must

4. Which of the following is NOT a disadvantage of a fixed exchange rate system?

  • Significant capital flows may destabilise the economy.
  • Significant capital flows may destabilise the economy.
  • Companies will have problems because of uncertainty about import and export prices.
  • Governments cannot allow the exchange rate to depreciate to restore balance of payments equilibrium.

5. If the value of the pound increases, who will benefit most?

  • UK importers of materials
  • UK businesses
  • UK exporters of goods
  • UK tourism

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