The economic climate on businesses study guide

A credit facility that allows a business to withdraw more money than its current account balance, up to an agreed limit.

The percentage a lender charges on a loan, expressed as a proportion of the principal.

The state of having paid work, typically measured by the number of people employed in an economy.

A product whose demand rises when consumer income increases.

Exam practice

• 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?
• A small manufacturer takes a loan of £50,000 at an annual interest rate of 5%. If the rate rises to 6%, how much more interest will the manufacturer pay in one year? Show calculation.
• Which of the following best explains how a rise in employment levels can affect the sales of a small manufacturer?
• Analyse how a rise in employment levels could influence the sales of an online service business.
• Which of the following best describes the effect on the demand for a luxury fashion item when consumers’ disposable income falls?
• Explain how the demand for an online streaming service might change if consumers’ incomes rise, and give one example of a business response to this change.