Government, taxes and interest rates Cambridge IGCSE Business Studies revision
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In plain words
A business does not operate alone. The government sets the taxes it pays, the taxes its customers pay, and through the central bank the cost of borrowing. A change in any of them can lift sales or sink them.
Managers cannot control these changes. They can only see them coming and respond.
6 things to know
- Government economic objectives: growth in GDP, low unemployment, low inflation, and a healthy balance of payments.
- Higher income tax leaves consumers with less to spend, so sales fall, most of all for luxuries. Higher tax on profits leaves a business with less to invest. Higher taxes on spending raise prices.
- Higher government spending raises demand, especially for businesses that supply the government or build roads, schools and hospitals. Better infrastructure helps every business.
- Higher interest rates make loans and overdrafts dearer, so businesses borrow and invest less. Consumers with loans have less to spend, and buy fewer goods on credit.
- Governments also affect business through laws and through trade policy, such as tariffs and membership of trading blocs.
- Businesses respond by cutting costs or prices, delaying investment, reducing borrowing, or looking for new markets.
Tips and tricks
- Follow the chain to the business in the question: "interest rates rise, so customers pay more on their loans, so they have less to spend, so the firm's sales fall".
- A business with large loans is hit twice by an interest rate rise: its own costs go up, and its customers spend less.
It lands in your notebook with its questions as flashcards.
Government, taxes and interest rates: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
What is the likely effect on consumer spending of a rise in income tax?
People have less disposable income.
A rise in interest rates makes
Loans and overdrafts cost more.
Which business is most likely to gain from higher government spending on roads?
It may win the contracts to build them.
How might a business respond to a rise in interest rates?
Dearer loans make new projects less worthwhile.
A tax on a business's profits reduces
Less is left after tax for investment or dividends.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 8 marks. Write your answers on paper, then check them.
Government, taxes and interest rates
Cambridge IGCSE Business Studies 0450 · 8 marks · papermunch.org
Name ______________________________ Date ______________
State two economic objectives of a government.[2]
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Any two of: economic growth, low unemployment, low inflation, balance of payments stability.
Explain how a rise in interest rates could affect a business that sells furniture.[3]
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Customers often buy furniture on credit, which becomes more expensive, and people with loans have less left to spend, so sales are likely to fall. If the business has loans of its own, its interest costs rise too.
Explain how a cut in income tax might affect a restaurant.[3]
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Consumers keep more of their income, so their disposable income rises. They can afford to eat out more often, so the restaurant's sales and profit are likely to rise.
Answers: Government, taxes and interest rates
- 1. Any two of: economic growth, low unemployment, low inflation, balance of payments stability.
- 2. Customers often buy furniture on credit, which becomes more expensive, and people with loans have less left to spend, so sales are likely to fall. If the business has loans of its own, its interest costs rise too.
- 3. Consumers keep more of their income, so their disposable income rises. They can afford to eat out more often, so the restaurant's sales and profit are likely to rise.