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Outline the impact of the following economic variables on Irish businesses - Leaving Cert Business - Question 2 B - 2019
Question 2 B
Outline the impact of the following economic variables on Irish businesses. Inflation rate Interest rate Employment rate
Worked Solution & Example Answer:Outline the impact of the following economic variables on Irish businesses - Leaving Cert Business - Question 2 B - 2019
Step 1
Inflation rate
Answer
Increasing inflation rates can lead to several impacts on Irish businesses:
- Reduced Spending by Consumers: Higher inflation typically results in decreased disposable income, as consumers may spend more on necessities, leaving less for other goods and services.
- Cost of Borrowing Increases: Inflation often leads to higher interest rates, which raises the cost of borrowing for businesses.
- Risk of Wage Inflation: Businesses may face pressure to increase wages to keep up with inflation, affecting profit margins.
- Decreased Competitiveness: Rising costs associated with inflation may lead to businesses becoming less competitive compared to those in regions with lower inflation rates.
Step 2
Interest rate
Answer
High interest rates impact businesses in various ways:
- Increased Cost of Capital: Higher interest rates make it more expensive for businesses to borrow money for expansion or operations.
- Strained Cash Flow: Businesses relying on short-term financing must manage increased costs and ensure timely repayments.
- Sales Revenue Risks: Higher interest rates can dampen consumer spending, leading to reduced sales and revenue.
- Decreased Disposable Income for Consumers: Consumers may cut back on spending due to higher debt servicing costs, which can lead to reduced sales for businesses.
Step 3
Employment rate
Answer
Increasing employment rates lead to several consequences for businesses:
- Higher Consumer Income: More employed individuals generally have more income, thereby increasing demand for goods and services.
- Increased Upward Pressure on Wages: As employment rises, businesses may face pressure to increase wages to attract and retain talent.
- Difficulty Expanding Workforce: Businesses might find it harder to source additional workers without enhancing salary or benefits packages, affecting growth prospects.
- Enhanced Worker Motivation: A rising employment rate can lead to greater job security and morale among existing employees, positively impacting productivity.