Page 311 - Cambridge IGCSE Business Studies

24: Government economic objectives and policies

Policy change Effect on consumers Effect on businesses Business response
Increase in ■ Cost of borrowing increases ■ Credit/cost of borrowing is ■ Firms may delay or cancel their
interest rates. thus people will borrow less. more expensive; interest costs plans to expand as the cost of
■ More incentive to save thus rise. borrowing
they will spend less. ■ With people spending money is high.
less, business sales
will drop.

Table 24.3 The effects of an increase in interest rates

In the long term, an increase in interest rates may lead to the following eff ects on
the economy:

Exchange rate appreciation: ■ Reduced business activity leading to slow economic growth.
see Chapter 26, page 337.
■ High rate of return from savings will encourage individuals and financial institutions
from other countries to invest their money with the banks in that country. This
strengthens the national currency and leads to exchange rate appreciation. This
will make imports cheaper.

TOP TIP Changes in taxation and
Make sure you understand what interest rates aff ect businesses
happens when interest or tax differently. Generally, businesses

rates change. If rates rise, what
that produce non-essential/
does this mean for businesses
and consumers? Can you luxury goods and services (such
explain it? as electronic gadgets and the
tourism industry) are aff ected 309
the most by changes in taxation
policies. Businesses that produce
essential goods and services,
Shoppers at a store in Hong Kong
such as food and health-related

products, are less affected by such changes. People cannot do without essential
goods and have to buy them no matter how expensive they are.

ACTIVITY 24.5

The interest rate changes made by the Bank of Botswana from 2008 to 2012 are shown Figure 24.9.

16 16

14 14

12 12

10 10

8 8

6 6
Jan/10 Jan/12

Figure 24.9 Interest rates in Botswana, 2008–2012
Source: www.tradingeconomics.com, the Bank of Botswana