Business Studies – 6.1.2 Effects of government policy | e-Consult
6.1.2 Effects of government policy (1 questions)
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Effects of Increased Interest Rates on Businesses:
Increased interest rates make borrowing more expensive. This impacts businesses in several ways: Increased cost of borrowing for loans, mortgages, and other forms of financing. Reduced investment as the cost of funding new projects rises. Lower consumer spending as consumers are less likely to take out loans for purchases, reducing demand for business products and services. Increased cost of servicing existing debt, impacting profitability.
Business Reactions:
- Reduce Investment Plans: Businesses may postpone or cancel planned capital investments (e.g., new equipment, expansion) due to the higher cost of borrowing.
- Improve Cash Flow Management: Businesses will focus on managing their cash flow more effectively. This might involve negotiating longer payment terms with suppliers, offering discounts for early payment from customers, or reducing inventory levels.
- Seek Alternative Funding Sources: Businesses might explore alternative funding options, such as equity financing (selling shares) or government grants, to avoid relying solely on expensive loans.