1.5.4b Interest rates, government taxation and exchange rates Quiz: Pearson Edexcel Business, Unit 5

The 20 questions

1. What happens to a business's borrowing costs when interest rates rise?

   • Borrowing is no longer needed, because rising rates pay off all debts automatically
   • Borrowing becomes cheaper, so interest payments on loans and overdrafts fall
   • Borrowing becomes more expensive, so interest payments on loans and overdrafts increase
   • Borrowing costs are unaffected, because interest is fixed by the bank for ever

2. How might a rise in interest rates affect consumer spending?

   • Households are unaffected, because interest rates only affect banks and lenders
   • Households save nothing, so spending on goods rises sharply in the shops
   • Households always spend more, because higher rates make people feel richer overall
   • Households may borrow less and spend less, especially on goods bought on credit

3. A business has a variable-rate loan. What happens if interest rates fall?

   • Its interest payments stay the same because they are always fixed
   • Its loan is cancelled automatically by the bank
   • Its interest payments rise sharply, which reduces profit
   • Its interest payments fall, which can improve profit

4. What is government taxation's effect on a business if corporation tax is raised?

   • Profit after tax rises, because the business will pay more to the government
   • Profit after tax falls, which may reduce funds available for investment
   • The business becomes exempt from all future taxes
   • Profit is unaffected, because tax is paid by customers

5. Which of these is a way government taxation can affect consumers?

   • Higher VAT can raise the prices consumers pay for goods
   • Lower VAT always increases the price of goods for consumers
   • Taxes have no effect on consumers because they are paid by the business only
   • Taxes remove the need for consumers to pay for anything at all

6. What is the effect on a UK business that exports to the USA if the pound strengthens against the dollar?

   • Its goods become free for US buyers, which removes all competition
   • Its goods become cheaper for US buyers, which always increases demand
   • Its goods become more expensive for US buyers, which may reduce demand
   • Its goods are unaffected because exchange rates only apply to imports

7. A UK business imports components priced in euros. What happens if the pound weakens against the euro?

   • The components become more expensive, which raises the business's costs
   • The components are unaffected, because imports are not priced in foreign currency
   • The components become free, because a weaker pound removes all import costs
   • The components become cheaper, which reduces the business's costs

8. What is the main effect of a fall in exchange rate value of a currency on an exporter?

   • Exports are unaffected, because overseas buyers never compare prices
   • Exports become dearer for overseas buyers, which always reduces sales
   • Exports become cheaper for overseas buyers, which may increase sales
   • Exports are stopped by law until the exchange rate returns to normal

9. A business's overdraft has a variable interest rate. Its bank raises the base rate. What is the most likely effect?

   • The business's overdraft interest is unaffected because it is set by the business alone
   • The business pays less interest on the overdraft, which increases profit
   • The business pays more interest on the overdraft, which reduces profit
   • The business's overdraft is cancelled, so it must repay at once

10. Why might a government raise taxes on businesses?

    • To make businesses cheaper to run in the economy
    • To reduce the number of customers who buy goods
    • To raise revenue to fund public services
    • To prevent businesses from ever employing people

11. How might high interest rates affect a business that is planning to expand?

    • Expansion is unaffected, because interest rates only matter to individual borrowers
    • Expansion becomes cheaper, because higher rates reward businesses that choose to grow
    • The cost of borrowing for expansion rises, which may delay or reduce investment
    • Expansion is required by law whenever interest rates rise above 5% for a year

12. A business sells a product in France. What effect does a rise in the value of the pound have on its sales in France?

    • Its product becomes cheaper for French customers, which always increases sales
    • Its product becomes free for French customers, which removes all competition
    • Its product is unaffected, because France uses the euro and not the pound
    • Its product becomes more expensive for French customers, which may reduce sales

13. What is one effect of a government cutting income tax for consumers?

    • Consumers have no change in income, so spending on goods is unaffected overall
    • Consumers must pay more tax on every item they buy from the shops
    • Consumers have more disposable income, which may increase spending
    • Consumers have less disposable income, which reduces spending in the high street

14. Which of these is most likely to be a result of a business facing a rise in corporation tax?

    • The business may cut investment or raise prices to protect profit
    • The business is no longer required to pay any tax on its profits
    • The business automatically doubles its investment to offset the tax
    • The business's profit rises, because it has to pay the tax

15. Why might a business with overseas customers want to monitor exchange rates?

    • Because exchange rates determine the business's legal structure, such as whether it is a company
    • Because exchange rates set the level of its annual tax bill, which is worked out each year by the state
    • Because changes in exchange rates can change the price of its goods to those customers
    • Because exchange rates only matter to banks and not to businesses, so managers can ignore them

16. Which of these is an effect of higher interest rates on a household with a mortgage?

    • Monthly mortgage payments rise on a variable-rate loan
    • The household no longer needs to make any mortgage payments at all
    • The household's mortgage is cancelled by law
    • Monthly mortgage payments fall on any mortgage, whatever its type

17. A business that imports raw materials sees the pound fall against the dollar. How might it respond?

    • It might stop buying any raw materials and close immediately to avoid the losses
    • It might ask customers to pay the currency difference directly on each order
    • It might find alternative UK suppliers, or raise prices to cover higher costs
    • It might ignore the change, because exchange rates never affect business at all

18. What is a likely effect of a government increasing VAT on a business selling luxury goods?

    • Customers will buy more luxury goods because VAT makes goods more attractive
    • The business becomes exempt from all sales taxes permanently
    • Customers may buy fewer luxury goods because they cost more
    • The business will automatically pay no costs because VAT is refunded

19. Which of these is a benefit of lower interest rates for a business?

    • Interest payments become unlimited, so the business can borrow without limit
    • Borrowing costs fall, making investment and expansion more affordable
    • Borrowing costs rise, making investment more attractive to lenders
    • Lower interest rates remove the need for the business to make any profit

20. How might a business respond to a rise in corporation tax without cutting staff?

    • By improving efficiency or raising prices to protect its profit margin
    • By refusing to pay any taxes and hoping no one notices the change
    • By moving its head office to a country where it cannot be taxed at all
    • By paying its staff in shares to avoid paying tax on wages

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