Economic: Government Policies (Cambridge (CIE) A Level Business): Revision Note

• Commercial banks receive cash for their bonds so liquidity in the market increases

  • Commercial banks lower their lending rates, so consumers and firms borrow more, leading to increased consumption and investment and economic growth

• Economic growth increases

• Inflation rises

• Unemployment may fall as output is increasing and more workers are required

• With higher price levels exports may decrease and with rising incomes, imports may increase

• Existing loan repayments for households become more expensive

  • Discretionary income reduces, so consumption decreases and total demand falls

• Firms are less likely to borrow  

  • Less investment in capital takes place, leading to lower growth

• The exchange rate appreciates, so exports become more expensive and imports cheaper

  • Net exports reduce, leading to lower economic growth

• Economic growth slows down

• Inflation eases

• Unemployment may increase as output is falling and fewer workers are required

• Both exports and imports reduce as exports are more expensive due to higher exchange rate and imports cheaper (but households have less income for imports)

• Money becomes costly , so firms try to pay off debt or borrow less

• Projects that require big loans (new factory, extra shops) may be delayed

• Customers have less to spend on items typically purchased on credit, such as cars or furniture, so firms may offer smaller product ranges or discounts

• Businesses may look to stabilise borrowing costs by moving from variable to fixed-rate loans

• Cheap credit may mean delayed growth plans can now be implemented

• Businesses may look to take out long-term loans before rates rise again

• Companies offering credit may run cheap finance deals to tempt buyers

• Businesses may stock up on extra inventory ready for higher sales

• Higher after-tax profits leads to more investment

• Inflation increases as firms now have more money to spend

• Unemployment decreases as businesses hire more workers to meet the increased demand for goods and services

• Higher household income leads to more consumption

• Inflation increases as households now have more money to spend

• Unemployment decreases as businesses hire more workers to meet the increased demand for goods and services

• Higher tax reduces households’ disposable income and consumption

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• Pay restraint lowers purchasing power, so consumer spending falls

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• Government buys fewer goods and services, directly shrinking demand

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• Firms delay or move investment abroad

• Some split into smaller companies to stay in a lower-tax band

• Prices or dividends may rise to cover the extra tax

• Shops drop prices and run flash sales so people buy sooner

• Extra stock is ordered and more staff put on the rota

• Sales brought forward help cash-flow

• Businesses invest where cash support is offered

• Local joint ventures are set up if the grant insists on home-grown suppliers

• Big public projects pull whole supply chains to the region

• Increasing government spending on education raises the quality of the workforce, resulting in productivity improvements

• Skills increase, leading to productivity improvements

  • The cost of production falls so selling prices can be lower, leading to improved international competitiveness

•  Increasing government spending on healthcare so that productivity improves

• Healthier workforce can improve productivity

  • Output increases, so businesses can better meet demand, leading to business growth

• Increased government spending on innovation increases the supply of potential jobs in the economy

• New industry emerges, leading to improved infrastructure

  • More jobs are created leading to long-term economic growth

• Increased government spending on infrastructure helps to facilitate the movement of people and goods, which increases supply

• New infrastructure is developed helping reduce costs of production

  • Supply increases so firms lower selling prices, leading to improved competitiveness

• Industrial policies are direct and targeted support to firms or industries in the form of subsidies 

• Businesses receive subsidies so their costs of production decrease

  • Increased profit is generated, allowing more investment in innovation

• Reducing income/corporation tax rates incentivises workers to work harder

• This provides firms with extra funds which they can use to invest in new machinery or technology

• Taxes decrease, so firms and individuals retain more money for themselves

• Incentives increase, leading to increased productivity and long-term growth

• Deregulation decreases costs, which may result in greater supply

• Privatisation encourages new firms to enter the market and compete, thus increasing supply in the economy

• Anti-monopoly regulations help increase competition, leading to a more efficient allocation of resources

• Regulation on firms decreases, so the cost of production falls

  • Firms can lower selling prices, improving international competitiveness

• State owned firms are privatised, so more firms enter the market to compete, leading to more competition and efficiency

• Decreasing trade union power so wages can be decreased

• Decreasing or abolishing minimum wages to lower costs of production

• Restructuring the unemployment benefits system to incentivise the unemployed to seek work

• Wages decrease so the cost of production falls

  • Firms can lower selling prices, leading to greater international competitiveness

• Upskill staff because courses cost less

• Shift workers onto new tech or processes faster

• Higher skills leads to fewer mistakes, less wastage and higher output per employee

• Boost research budgets and start projects that looked too risky before

• Bring new products to market sooner than rivals

• Adopt cutting-edge tech (AI, robotics) because the payback period is shortened

• Enter markets that used to need costly licences or long paperwork

• Redesign products or services now that rules are simpler

• Save compliance time and money, freeing cash for growth or price cuts

• A business's exports look cheaper overseas → exporters ramp up marketing and output

• Imported raw materials cost more → firms search for local inputs or trim ranges

• A business's exports look dearer → firms may cut prices or shift some production abroad

• Imported machinery and parts get cheaper → firms bulk-buy equipment or upgrade plants

• Retailers pass on lower import costs with special offers