Page 310 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 6 External influences on business activity

How changes in interest rates affect business activity

and how businesses respond
Monetary policy is how a country’s government or central bank controls how much

money there is in circulation. The government or central bank uses interest rates to
maintain economic growth and keep infl ation low.
Interest rates determine:

■ the money that an individual or a financial organisation can gain when they deposit
money with a bank
■ the cost of borrowing money from a bank.

Some Islamic countries follow Sharia law, which does not permit financial gain on

loan of money. These countries combine standard and Islamic banking principles

(which are based on profit-sharing and non-interest-based lending and borrowing).

CASE STUDY Interest rates in Indonesia

The Central Bank of the Republic of Indonesia controls the interest rates in that country. In the global recession of
2007, the Central Bank cut interest rates to encourage borrowing for spending and new investments, which led to
economic growth. Figures 24.7 and 24.8 show the interest rates and the GDP in Indonesia from 2006 to 2012.

Billions of US dollars
14 14 1,000 1,000
308 12 12 800 800
10 10
600 600
8 8
400 400
6 6
4 4 200 200
Jan/06 Jan/08 Jan/10 Jan/12 2006 2008 2010 2012
Figure 24.7 Interest rate in Indonesia Figure 24.8 GDP in Indonesia
Source: www.tradingeconomics.com and Bank of Indonesia Source: www.tradingeconomics.com and Bank of Indonesia

TASK
a What has been the change in interest rates from 2006 to 2012?

b How has the change in interest rates from 2006 to 2012 affected the GDP of Indonesia?
c Analyse how the change in interest rates may have helped economic growth and businesses in Indonesia.
d Analyse the changes in interest rates in your country, over the past five years.
e Which is the main authority controlling the interest rates in your country?
f Evaluate and discuss whether these changes have proved to be beneficial for economic growth and businesses in
your country.

Table 24.3 explains the effects of increase in interest rates on consumers and

businesses and how businesses respond to this.