STARTER: WHAT IS THE INTEREST RATE IN THE UK?

Interest Rates

• To identify what interest rates are and how they change

• To analyse the impact changing interest rates have on businesses

• To evaluate the effects of the changing interest rates on a real life business

What would the government do in order to increase spending?

Impacts of Interest Rate

• http://www.telegraph.co.uk/finance/comment/matthew-lynn/11880094/Low-interest-rates-are-here-to-stay-and-thats-not-necessarily-a-bad-thing.html

• Read through the article and note down the advantages and disadvantage of a low interest rate

Impact of low interest rates for….

• Businesses • Consumers • Investment

• A fall in interest payments on loans will have a beneficial effect on firms that are highly geared.

• Interest payments are fixed costs – so fixed costs for these firms will fall

• Businesses can in turn cut prices and increase competitiveness

• As unit costs fall, there will be a rise in profit margins unless price is reduced.

The effect on costs/profits

The effect on exports/imports

• If interest rates increase, this will lead to an increase in the value of the pound.

StrongPoundImportsCheaperExportsDearer

This means that as interest rates increase, demand for UK goods at home and abroad will fall as imported goods are priced more competitively.

Task

• Explain the likely impact of the trend in interest rates since 2006 on a motor manufacturer that sells its vehicles in the UK and abroad. Use data that you have researched to back up your answer.