Question 1: Define 'inflation' and explain how it can affect consumer spending habits.

Answer: Inflation is the general increase in prices over a period of time, which reduces consumers' purchasing power. As prices rise, consumers may buy less or seek cheaper alternatives, affecting business sales.

Question 2: Describe two ways in which a recession might impact a small business.

Answer: A recession can reduce consumer spending, leading to lower sales for the business. It may also increase borrowing costs and reduce access to finance, making expansion or investment difficult.

Question 3: Explain the term 'interest rates' and discuss how changes in interest rates can influence business investment decisions.

Answer: Interest rates are the cost of borrowing money, usually expressed as a percentage. When interest rates rise, borrowing becomes more expensive, which can deter businesses from taking loans to fund new projects. Conversely, lower interest rates encourage investment.

Question 4: Identify and explain two economic factors that could lead to increased costs for a manufacturing business.

Answer: Rising inflation can increase the cost of raw materials and wages. An increase in interest rates can also raise borrowing costs for financing equipment or expansion.

Question 5: A government announces a new policy to increase taxes on imports. Explain how this could affect a UK-based retailer that imports goods from abroad.

Answer: Higher import taxes would increase the cost of imported goods, potentially leading to higher retail prices. This could reduce demand from consumers and make imported goods less competitive compared to locally produced alternatives.

Question 6: Sketch a simple diagram illustrating how an economic recession can lead to decreased consumer confidence. Leave space for students to draw arrows and labels.

Answer: A correct sketch would show a downward arrow indicating a decrease in consumer confidence, linked to declining spending and falling sales for businesses.

Question 7: Identify three economic indicators that businesses watch to assess the health of the economy and briefly explain why each is important.

Answer: Gross Domestic Product (GDP) shows overall economic output; a rising GDP indicates growth. Unemployment rate reflects workforce stability; high unemployment can reduce consumer spending. Inflation rate indicates price stability; excessive inflation can erode purchasing power.

Question 8: Discuss how fluctuations in the value of the British pound can impact export-focused businesses.

Answer: A weaker pound makes UK exports cheaper and more competitive abroad, potentially increasing sales. Conversely, a stronger pound makes exports more expensive, which could reduce demand from international buyers.

Question 9: Explain the concept of 'consumer confidence' and how it might be affected by economic changes.

Answer: Consumer confidence refers to how optimistic consumers feel about the economy and their financial situation. Economic downturns, rising unemployment, or inflation can decrease confidence, leading to reduced spending.

Question 10: Describe how government policies aimed at controlling inflation can influence business strategies.

Answer: Policies like raising interest rates or reducing money supply aim to control inflation. Businesses might respond by delaying investments, increasing prices cautiously, or focusing on cost-cutting to maintain profitability.