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The economic climate on businesses
Study how changes in the economy affect borrowing, spending, demand and business decisions.
4
Objectives
8
Flashcards
8
Questions
72 min
Study time
AqaGcseBusinessInfluences on business
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Syllabus checklist
What you need to know
4 objective pages available
Interest rates2 objectives
- Explain how changes in interest rates affect businesses that use overdrafts and loans.
- Explain how changes in interest rates affect consumer and business spending.
Employment and consumer spending2 objectives
- Identify how and why changes in employment levels may affect businesses.
- Discuss how demand for products and services may change as incomes fluctuate.
Key terms
Interest rateEmploymentIncome Elasticity of Demand
Exam tips
- Show your working in calculation questions: Write out the formula, plug in the numbers, and state the units; this demonstrates understanding and helps avoid careless errors.
- Planning for interest rate changes: Always calculate the impact of rate changes on loan repayments before committing to new debt.
Common mistakes
- Misunderstanding interest rate effect on overdraft: The rate changes the interest cost; the principal remains the same unless the overdraft is repaid.
- Assuming all businesses react the same to interest rate changes: Business response depends on borrowing needs, cash flow, and alternative financing; some may continue spending if they have strong cash reserves.
Practice preview
- If a business’s overdraft interest rate rises from 4% to 6% per annum, what is the most likely immediate effect on its cash flow?
- A small manufacturer has an overdraft of £8,000. The interest rate on the overdraft is 5% per annum. If the rate rises to 7% per annum, calculate the additional interest cost for a 6‑month period.
- If the Bank of England raises the base interest rate, what is the most likely immediate effect on consumer spending?
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