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The economic environment for business

Monetary policy

Monetary policy is concerned with influencing the overall monetary
conditions in the economy.

In particular:

 the volume of money in circulation – the money supply

 the price of money – interest rates

2.1 Impact of monetary policy on business decision making

Factors Achieved by controlling supply Achieved by increasing interest
affected rates

Availability of Credit restrictions mean small
finance businesses can struggle to raise
funds

Cost of finance Reduced supply pushes up the cost Shareholders require higher
of funds and discourages business returns to make investing in shares
expansion worthwhile compared to interest
earning investments. Without an
increase in return, share price falls.

Level of Too difficult to raise funds to spend Saving becomes more attractive,
consumer borrowing to spend is less
demand attractive.

Exchange rates High interest rates attract foreign
investment and leads to a short-
term increase in exchange rates
(increased demand for currency)

Exports become dearer
Imports become cheaper

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