The Economic Climate
How the wider economy affects a business: the cost of borrowing when interest rates change, the level of employment, and how consumer spending rises and falls as incomes change.
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The weather the economy sets
No business works in a bubble. The wider economy sets the weather it trades in: how much it costs to borrow, how many people have jobs, and how much shoppers are willing to spend. This module works through interest rates, employment and consumer spending, and how each one changes what a business can do. The focus is the effect on the business, not why the numbers move.
Economy words to know
Learn these before you weigh up the climate.
Rates up against rates down
A change in interest rates pushes a business two ways at once.
Link the change to what the firm feels
In the exam, focus on the effect on the business, not why the rate moved. When interest rates rise, a firm with loans pays more and customers hold back, so demand usually falls. As employment grows, households earn and spend more, which helps sales. Always link the change in the economy to what the business feels: its costs, its demand, or both, and then give a sensible response.
Match the term
- economic climate
- interest rate
- consumer spending
- employment level
- the general state of the economy
- the cost of borrowing money
- what households spend on goods
- how many people have jobs
Match change to effect
- interest rates rise
- interest rates fall
- employment rises
- employment falls
- loans cost more and demand tends to drop
- borrowing is cheaper and demand tends to grow
- more people have income to spend
- households have less to spend
What happens to loan costs?
When interest rates rise, what usually happens to a business with a large loan?
- Its loan repayments cost more
- Its loan repayments cost less
- Its loan simply disappears
- It gains free money
True about the climate
Select the TWO true statements about the economic climate.
- Higher interest rates make borrowing more expensive for a business
- When more people are employed, consumer spending tends to rise
- Falling interest rates always reduce a business sales
- The economic climate has no effect on a business
Total the interest
A business pays 150 pounds of interest each month on its overdraft. Multiply the monthly cost by 12 to find the total interest paid in a year in pounds. What is the answer?
Order the knock-on effect
Put the chain of effects in order after interest rates rise, earliest first.
- Interest rates in the economy rise
- A business with a loan pays higher repayments
- Customers with loans also spend less
- The business sees its demand and profit fall
Complete the rules
The general state of the economy a business works in is the economic _____. The cost of borrowing money is the _____ rate. When more people are in work, consumer _____ tends to rise. When interest rates rise, a business with a loan pays _____ repayments.
Spot the effects of a rate rise
Tap the TWO things that happen to a business when interest rates rise.
- its loan repayments become more expensive
- customers spend less, so demand falls
- its loan is instantly cancelled
- it pays no interest at all
Judge the effect
Read each case and choose the best answer.
- Interest rates go up and a shop has a big bank loan. What is the likely effect on the shop?
- Unemployment rises sharply in a town. What is the likely effect on local shops?
- Interest rates are cut and borrowing becomes cheaper. What might a growing business do?
Explain the economic climate
Explain how the economic climate affects a business, using interest rates, employment and consumer spending.
- Explain what the economic climate means
- Explain how a change in interest rates affects a business
- Explain how employment and consumer spending affect a business