Podcast
Questions and Answers
What is a likely effect of high or fluctuating inflation on businesses?
What is a likely effect of high or fluctuating inflation on businesses?
- Difficulty in determining future prices (correct)
- Increased certainty in long-term planning
- Decreased need for market research
- Consistent and predictable pricing
What are 'shoe leather costs' primarily related to?
What are 'shoe leather costs' primarily related to?
- The expense of employee salaries
- Costs associated with researching market prices (correct)
- The cost of reprinting menus
- Increased cost of raw materials
What are 'menu costs' associated with during periods of inflation?
What are 'menu costs' associated with during periods of inflation?
- The expense of worker's pay
- Increased cost of ingredients
- Costs related to changing prices (correct)
- Expenditures of marketing and advertising
Why might workers be more inclined to take industrial action during periods of high inflation?
Why might workers be more inclined to take industrial action during periods of high inflation?
What is a potential problem for businesses when entering long-term contracts during times of uncertainty?
What is a potential problem for businesses when entering long-term contracts during times of uncertainty?
What typically happens to interest rates during prolonged inflation?
What typically happens to interest rates during prolonged inflation?
How do consumers tend to react to prolonged inflation?
How do consumers tend to react to prolonged inflation?
What is a likely impact of high inflation rates in a country compared to its trading partners?
What is a likely impact of high inflation rates in a country compared to its trading partners?
What is one action businesses might take to respond to rising inflation?
What is one action businesses might take to respond to rising inflation?
How might businesses respond to inflation-proof wage demands from employees?
How might businesses respond to inflation-proof wage demands from employees?
What does the exchange rate show?
What does the exchange rate show?
What happens if the demand for UK exports rises?
What happens if the demand for UK exports rises?
What happens when an exchange rate falls?
What happens when an exchange rate falls?
How are businesses affected by fluctuating exchange rates?
How are businesses affected by fluctuating exchange rates?
How can an export business find the prices of its products when the exchange rate appreciates?
How can an export business find the prices of its products when the exchange rate appreciates?
What do importers benefit from?
What do importers benefit from?
If the depreciation is sustained, what may importers have to consider?
If the depreciation is sustained, what may importers have to consider?
What is building up inventories ahead of further inflation so that products are sold at future higher prices a response to?
What is building up inventories ahead of further inflation so that products are sold at future higher prices a response to?
What is the impact of domestic costs rising?
What is the impact of domestic costs rising?
What represents a cost to importers?
What represents a cost to importers?
Flashcards
Menu Costs
Menu Costs
Costs incurred by businesses when they have to change prices, such as reprinting menus or updating websites.
Shoe Leather Costs
Shoe Leather Costs
The expenses businesses face when searching for the best deals on supplies and monitoring competitors' prices due to inflation.
Hyperinflation
Hyperinflation
When the inflation rate is extremely high (over 100% per annum).
Consumer Reaction to Inflation
Consumer Reaction to Inflation
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Impact of High Inflation on International Competitiveness
Impact of High Inflation on International Competitiveness
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Business Responses to Rising Inflation
Business Responses to Rising Inflation
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Exchange Rate
Exchange Rate
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Appreciation
Appreciation
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Depreciation
Depreciation
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Business Response to Exchange Rate Appreciation (Exporters)
Business Response to Exchange Rate Appreciation (Exporters)
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Business Response to Exchange Rate Appreciation (Importers)
Business Response to Exchange Rate Appreciation (Importers)
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Business Response to Exchange Rate Depreciation (Exporters)
Business Response to Exchange Rate Depreciation (Exporters)
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Business Response to Exchange Rate Depreciation (Importers)
Business Response to Exchange Rate Depreciation (Importers)
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Study Notes
- Inflation rates between 0-4% are unlikely to significantly impact businesses.
- High or fluctuating inflation can damage businesses.
Impact of Inflation: Increased Costs
- High inflation increases costs for businesses in several ways
- Businesses spend more time researching supplier prices
- Monitoring competitor prices becomes time-consuming
- Shoe leather costs are incurred when gathering price information
- Menu costs include reprinting menus with updated prices
- Annual pay negotiations, rather than longer-term deals, and potential strikes
Impact of Inflation: Uncertainty
- Businesses face uncertainty about future prices with high inflation
- Decisions about investment become difficult
- Long-term contracts pose a challenge due to unknown inflation rates
Impact of Inflation: Borrowing and Lending
- Inflation reduces the real value of past debts
- Borrowers initially benefit, while lenders are harmed
- Interest rates rise to match inflation and become index-linked
Consumer Reactions to Inflation
- Prolonged inflation increases saving, reduces consumer confidence, and discourages borrowing
- Increased saving leads to decreased spending, impacting businesses
- In hyperinflation, spending patterns change drastically, with consumers spending wages immediately
Impact of Inflation: International Competitiveness
- High domestic inflation makes businesses uncompetitive in international markets
- Businesses lose sales and market share
- Imports become relatively cheaper, affecting domestic businesses
Business Responses to Inflation
- Businesses may respond to rising inflation by various protection strategies
- Search for cheaper suppliers.
- Increase prices to compensate for higher costs
- Negotiate cautiously with employees during wage demands for higher pay
- Build up inventories in anticipation of future price increases
- Outsource or relocate production to countries with lower costs.
Exchange Rates
- Different countries use different currencies, affecting transactions
- Exchange rates determine the price of one currency in terms of another
- Businesses buying goods from other countries typically pay in the supplier's currency
Impact of Exchange Rate Appreciation on Imports and Exports
- Exchange rates fluctuate due to market forces
- Increased demand for a currency leads to appreciation
- Appreciation affects the prices of exports and imports
- Appreciation means exports become more expensive and imports become cheaper
Impact of Exchange Rate Depreciation on Imports and Exports
- Depreciation refers to situation when the exchange rate falls
- The impact on imports and exports is opposite when exchange rate increase
How Businesses are Affected by Exchange Rates
- Exchange rate changes can benefit or harm businesses
- Fluctuating rates create unpredictability for demand, planning and budgeting
Business Responses to Exchange Rate Changes
- Responses depend on whether a business is an exporter or importer and whether the exchange rate appreciates or depreciates
Appreciation Strategies
- Export businesses may lower prices or improve service to offset trading disadvantages due to appreciation
- Domestic sales can also be increased or new markets found independent from exchange rates
- Importers may build up inventories, lower prices, or expand operations
Depreciation Strategies
- Export businesses can raise prices or boost sales in response to improved trading conditions from depreciation
- Importers may accept lower margins, raise prices, or consider measures against higher inflation
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