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The economic environment for business

All the above factors also influence inflation, which has a significant impact on
business cash flows and profits. Inflation may be:

 demand-pull inflation – due to excess demand

e.g. if interest rates are lowered, people are encouraged to spend rather than save.
The increased demand for products and services may not be met quickly with an
increased supply and in the meantime prices will rise.

 cost-push inflation – due to higher costs

e.g. lowering interest rates can lead a decrease in the local exchange rate. This can
mean that imports become more expensive, pushing production costs up and leading
to suppliers increasing prices to maintain profit.

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