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    Hello there guys!!!!
    The situation is that...
    In 2009, the Bank of England reduced interest rates to a record low of 0.5%. To what extent do you think that it is inevitable, that a rise in interest rates will lead to a fall in demand for a business’s products and services?

    Can you please help me with this??
    I will appreciate your comments.
    Thanks!!!
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    (Original post by N.Zafar)
    Hello there guys!!!!
    The situation is that...
    In 2009, the Bank of England reduced interest rates to a record low of 0.5%. To what extent do you think that it is inevitable, that a rise in interest rates will lead to a fall in demand for a business’s products and services?

    Can you please help me with this??
    I will appreciate your comments.
    Thanks!!!
    Ooof, that's a lovely question! There's so much you can do with it.

    Think about what should happen when banks raise interest rates. People should be encouraged to start saving and stop borrowing. Businesses will have to pay more for their existing loans and so prices will rise to cover it (business debt is usually long term debt and so can't be paid back straight away), and they're less likely to expand etc so they're not going to take advantage of future economies of scale.
    So you've got less spending and higher prices - what does that do to demand.

    But people still need to eat, so depending on what your business makes demand might actually go up. This is certainly true for Aldi and Lidl. Consumers have been forced to look at cheaper options, because they can't afford the expensive usual items. So demand for some items will actually increase! This will be a shift towards Value lines in shops (eg Tesco Value, Sainsburys Basics) but also certain items - people will buy less steak and may buy brisket instead as an alternative.
    Linked with this, there might even be an increase in sales of cookery books and slow cookers - people will have to figure out what to do with their brisket, and so sales of equipment to make it nicer/easier to cook might increase.
    But it's not just food - people also want other things like entertainment, heating etc. So people might stay at home and watch Netflix or play Scrabble. They might buy another duvet instead of putting the heating on. So there's a whole range of slightly cheaper alternatives where demand might increase instead.

    The other part to consider is that the interest rate is 0.5%. That's really low. A rise in interest rate would take it to say 1%. That's still really low. It's likely that people won't care. People aren't going to be inspired to put money into savings when they only earn £1 for every £100 they save for a year. And the cost of borrowing won't be so huge as to put people off either.
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    (Original post by Juno)
    Ooof, that's a lovely question! There's so much you can do with it.

    Think about what should happen when banks raise interest rates. People should be encouraged to start saving and stop borrowing. Businesses will have to pay more for their existing loans and so prices will rise to cover it (business debt is usually long term debt and so can't be paid back straight away), and they're less likely to expand etc so they're not going to take advantage of future economies of scale.
    So you've got less spending and higher prices - what does that do to demand.

    But people still need to eat, so depending on what your business makes demand might actually go up. This is certainly true for Aldi and Lidl. Consumers have been forced to look at cheaper options, because they can't afford the expensive usual items. So demand for some items will actually increase! This will be a shift towards Value lines in shops (eg Tesco Value, Sainsburys Basics) but also certain items - people will buy less steak and may buy brisket instead as an alternative.
    Linked with this, there might even be an increase in sales of cookery books and slow cookers - people will have to figure out what to do with their brisket, and so sales of equipment to make it nicer/easier to cook might increase.
    But it's not just food - people also want other things like entertainment, heating etc. So people might stay at home and watch Netflix or play Scrabble. They might buy another duvet instead of putting the heating on. So there's a whole range of slightly cheaper alternatives where demand might increase instead.

    The other part to consider is that the interest rate is 0.5%. That's really low. A rise in interest rate would take it to say 1%. That's still really low. It's likely that people won't care. People aren't going to be inspired to put money into savings when they only earn £1 for every £100 they save for a year. And the cost of borrowing won't be so huge as to put people off either.
    Thank you for this lovely explanation. it has some really good analysis so i would consider it using some of it in my explanation.
    one again thank you
 
 
 
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