1. Watch the following video
ps/interest-rates/8495.html
What are interest rates?
How can they affect a business?

2. Interest rates Interest Rate Credit is about borrowing
Owing money to others for a period of time
Interest Rate
Cost of borrowing money
Calculated as a percentage
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3. Why do Businesses need credit?
To finance purchase of assets (e.g. stocks, machinery, computers)
To cover the period it takes customers to pay their invoices
Enable the business to grow (larger offices, new staff members)

4. Monetary Policy
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The deliberate use of interest rates to influence the level of economic activity is known as monetary policy
The UK “base rate” is an interest rate set monthly by the Monetary Policy Committee MPC of the Bank of England.
This rate acts as an indicator around which lending organisations base their rates of lending

5. Historic rates:

6. How can interest rates affect demand?
What forms of loan exist?
Mortgages
Short term personal loans
Credit cards
Overdrafts
These loans have “interest rates” where consumers will need to pay back a percentage on the amount borrowed

7. Task How can interest rates affect demand?
Think pair share:
How can interest rates affect demand?
Discuss what will happen to a household’s disposable income if:
Interest rates go up
Interest rates go down

8. How can interest rates affect demand?
Aggregate Demand represents the “total demand” for all goods and services in the UK – so interest changes tend to impact upon Aggregate Demand

9. Consumer demand Increase in interest rates:
Demand for goods and services is likely to fall
Consumers might chose to save rather than spend
Less willing to make credit purchases
Mortgage holders pay increased mortgage payments
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10. AD is not just made up of C
As we know AD=C+I+G+X-M
So how will an increase in interest rate affect the other elements of AD

11. Economic Growth – How?
We discussed in the last topic the importance of economic growth – (revision ..what is GDP?)
For businesses to expand and grow they often need loans to finance the growth
So interest rates affect business growth
And in turn economic growth
So what will happen to economic growth if interest rates are high?
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12. Task
Investigate the current interest rates being offered for personal/business loans and credit cards
Why are there different rates available?
How can lenders justify such differences in rates offered to customers
What is the impact of interest rates on a business
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13. Exchange Rate Policy
Exchange rates float and are set by market forces, demand and supply of the currency
So strictly speaking the government does not have an exchange rate policy
However the MPC will consider the impact of interest rate changes on the exchange rate of £ sterling
Extension task – it wasn’t always the case, look at events of black Wednesday!

14. Black Wednesday
In politics and economics, Black Wednesday is 16 September 1992, when the British Conservative government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM) after it was unable to keep the pound above its agreed lower limit in the ERM.
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