Interest and Exchange Rates

Interest Rates The Bank of England changes the interest rate in order to control the rate of ____________. The Bank of England aims to keep inflation within ____ of its target of _____ If it appears that _________ is getting too high, the Bank will increase interest rates and conversely, if _________ is getting too low rates will fall. inflation 1% 2.5% inflation

Inflation _________ is a general and sustained increase in prices. In other words _______ ____________ _____________ It is measured by looking at the price of ____________________ bought by most people each month It is quoted as _____________ annual figure –E.g. inflation of 5% means that on average this are 5% more expensive now than they were this time last year The _______________________________ __________ to help businesses. Inflation it’s when things get more expensive a “basket” of goods a percentage Government will want inflation to be low

Interest Rates Who will be affected by the changes? Households Businesses Exchange Rates All affected by an increase or a decrease in interest rates What happens if the interest rate decreases ? What happens if the interest rate increases ?

How are Households affected? Increase in Interest Rates ____________ = level of consumption will fall. As mortgage repayments have gone up, ________________________. more ______________________ money Save more disposable incomes will fall expensive to borrow

How are Households affected? Decrease in Interest Rates ______________ = level of consumption will rise As mortgage repayments have gone down ______________________ ___________________ money Spend more disposable incomes will rise Cheaper to borrow

How will it affect Firms? Increase in Interest Rates ____________ projects _____________ ____________ as repayments on any loans will go up. Businesses will therefore be ______ likely to undertake ______________________ Investment become more expensive less large investment projects

How will it affect Firms? Decrease in Interest Rates _____________________ more frequently as repayments are lower _______ likely to undertake ______ _____________ projects Loans are taken out More investment large

How is the Exchange Rate affected? Increase in Interest Rates  Individuals and firms will want to _____________________  A strong pound makes ___________________  A strong pound makes ____________________ invest money in the UK exports more expensive imports cheaper

Decrease in Interest Rates Firms will take their ____________ _________. A weak pound makes ____________ and ____________________ How is the Exchange Rate affected? investments abroad exports cheaper imports more expensive investments abroad exports cheaper imports more expensive

Exchange Rates British Goods and services are sold to _________ who have to ______ in order __________ them ________ ____________. The value of exchange rates affects _________ for _______________. foreigners buy £s to purchasefrom UK manufacturers the demand exports and imports

Exchange Rates £ Strengthens against other Currencies Value of £ RISES Exports become more expensive Imports are cheaper UK’s Competitiveness worsens £ Weakens against other currencies Value of £ FALLS Exports become cheaper Imports are more expensive UK’s Competitiveness improves £1 = $1.00  £1 = $1.50 £1 = $1.50  £1 = $1.00 rises cheaper falls cheaper expensive worsens improves