The Wider Economic Environment Summary

The Wider Economic Environment
Thursday, 2 May 2024 09:10



Definitions:

Interest rates is the cost of borrowing and the reward for saving.

Exchange rates is the value of one currency in terms of another.

Taxation is the process by which individuals or firms pay money to the
government.

Unemployment is when someone is willing, able and actively seeking work but is
unable to get a job.

Inflation is when there has been a sustained general rise in the price of goods and
services.


Interest Rates:

Rise in interest rates -> rise in cost of borrowing and a rise in the reward for
saving -> incentivise people to save -> fall in consumption -> fall in AD.

Fall in interest rates -> fall in cost of borrowing and a fall in reward for saving ->
firms more likely to take out loans -> increase in investment -> increase in both AD
and LRAS.

Rise in interest rates -> rise in mortgage payments (variable) -> decrease in
disposable income -> fall in consumption -> fall in AD.

Rise in interest rates -> increase in demand for pound in UK banks -> appreciation
of the pound -> SPICED.

Exchange Rates:

Decrease in exchange rate -> weak pound will mean that imports are more dear
and exports are cheap -> improve the trade deficit on the current account.

Rise in exchange rate -> exports become more dear -> therefor UK firms are less

competitive in international markets.