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Outline how the recent tightening (reduction) in the availability of credit may affect: (i) The Irish Motor Industry; (ii) Inflation; (iii) Ireland's Balance of Payments. - Leaving Cert Economics - Question e - 2009
Question e
Outline how the recent tightening (reduction) in the availability of credit may affect: (i) The Irish Motor Industry; (ii) Inflation; (iii) Ireland's Balance of Paym... show full transcript
Worked Solution & Example Answer:Outline how the recent tightening (reduction) in the availability of credit may affect: (i) The Irish Motor Industry; (ii) Inflation; (iii) Ireland's Balance of Payments. - Leaving Cert Economics - Question e - 2009
Step 1
The Irish Motor Industry
Answer
The tightening of credit availability affects the Irish motor industry in several ways:
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Decreased demand for cars: With reduced access to credit, consumers find it challenging to finance car purchases, leading to a decline in demand for both new and second-hand cars.
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Increased redundancies: As demand for cars decreases, the number of employees working in car sales may also drop, resulting in redundancies within the industry.
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Business closures/consolidations: Many small independent car dealerships may struggle to survive, leading to possible closures. Inability to acquire credit can cause cash flow issues, making it hard for these businesses to pay suppliers and maintain operations.
Step 2
Inflation
Answer
The impact on inflation is significant as well:
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Inflation will decrease: A reduction in the supply of credit typically leads to diminished consumer spending power, which in turn can cause a decrease in aggregate demand. This situation leads to a reduction in demand-pull inflation.
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Deflation: Furthermore, the decreased availability of money can result in the prices of goods and services falling, influenced by lower demand and production costs.
Step 3
Ireland's Balance of Payments
Answer
The reduction in credit availability impacts Ireland's Balance of Payments in the following ways:
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Imports decrease: A decrease in demand for goods and services means that there will be a corresponding reduction in the demand for imports.
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Imports increase: Conversely, consumers with limited spending power may switch to cheaper imported substitutes, impacting the local economy.
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Exports decrease: Businesses may struggle to secure credit for operations, which can lead to a decrease in investment and subsequently a drop in export activity, negatively influencing the balance of payments.