1. Interest and Exchange Rates

2. 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

3. 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

4. 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 ?

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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