Interest Rates (Edexcel IGCSE Business)
Revision Note
Written by: Lisa Eades
Reviewed by: Steve Vorster
The Impact of Interest Rates on Business
The interest rate is the cost of borrowing money and the reward for saving
Lenders charge interest on borrowing at a rate higher than that of the Central Banks base rate and award a lower rate on savings and investments
The Central Bank is the Governments bank and is responsible for managing the flow of money in an economy and also regulating the banking system
The Implications of Rising Interest Rates on a Business
Implication | Explanation |
---|---|
Higher loan repayments |
|
Fall in exports |
|
Credit sales fall |
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Savings become more attractive than investment |
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The Impact of Interest Rates on Consumer Spending
Low interest rates can stimulate demand in an economy
Household repayments on mortgages and short-term credit borrowing is likely to reduced
Consumers have more disposable income to spend on goods and services
They may take advantage of cheap borrowing to fund large purchases such as consumer durables
Low interest rates are not always beneficial for consumers
Some households rely on the income they receive from savings to fund their day-to-day living expenses
Pensioners and those using savings may struggle to afford necessities and are likely to reduce their non-essential outgoings, especially if inflation is high
Examiner Tips and Tricks
You may be asked to calculate the total cost of a loan at a given rate of interest. Make sure you show your working, give your answer in the given currency and write your final solution in the space at the bottom of the workings box.
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