AQA · GCSE · Business
Course version: 8132 · Version from Sept 2017
How fluctuating interest rates can affect consumer and business spending.
Full specification wording
The economic climate on businesses: how fluctuating interest rates can affect consumer and business spending.
Interest rates influence spending because they change the cost of borrowing and the reward for saving.
Checked against the AQA 8132 specification (opens in a new tab) on .
- Point 3 of 8
- 3 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Interest rates influence spending because they change the cost of borrowing and the reward for saving. When rates rise, consumers pay more on mortgages, credit cards and loans, so they keep less disposable income and buy fewer goods; businesses also pay more on overdrafts and loans, so they cut investment and stock. When rates fall, borrowing becomes cheaper and saving less attractive, so consumer spending and business investment tend to rise. The size of the effect depends on how much debt households and firms already hold and on confidence.
For example: A rise from 1% to 4% on a £200,000 mortgage adds about £6,000 a year in interest, reducing spending elsewhere.
What earns the marks
- Explain that higher interest rates raise loan and mortgage repayments, reducing disposable income and consumer spending.
- Explain that higher interest rates increase business borrowing costs, reducing investment and spending on stock or equipment.
- Explain that lower interest rates reduce borrowing costs and the reward for saving, encouraging consumer and business spending.
- Link changes in spending to demand for a business's products, sales revenue and profit.
- Recognise that the impact varies with levels of existing debt and consumer or business confidence.
- Use a numerical example to show how a rate change alters repayments and available spending.
Common mistakes and how to put them right
Claiming that a rise in interest rates always increases spending.
Put it right by explaining that higher repayments usually reduce disposable income and spending.
Ignoring the effect on savers.
Put it right by noting that higher rates can increase saving and further reduce consumer spending.
Treating all consumers and businesses as identical.
Put it right by recognising that those with more debt or variable-rate borrowing are affected more.
Exam tips
- Distinguish clearly between the effect on consumers and the effect on businesses in separate sentences.
- Use a numerical example such as a mortgage or loan repayment to support the explanation.
- Connect the change in spending to a business outcome such as lower sales, revenue or profit.
Try the lesson
The start of the The economic climate on businesses: how fluctuating interest rates can affect consumer and business spending. lesson, made from checked teaching notes for this specification point.
Have a go first
When interest rates rise, what usually happens to the amount that consumers and businesses borrow and spend?
Listen
Interest rates influence spending because they change the cost of borrowing and the reward for saving. When rates rise, consumers pay more on mortgages, credit cards and loans, so they keep less disposable income and buy fewer goods; businesses also pay more on overdrafts and loans, so they cut investment and stock. When rates fall, borrowing becomes cheaper and saving less attractive, so consumer spending and business investment tend to rise. The size of the effect depends on how much debt households and firms already hold and on confidence. For example, a rise from 1% to 4% on a £200,000 mortgage adds about £6,000 a year in interest, reducing spending elsewhere. A strong answer earns marks for these points. Explain that higher interest rates raise loan and mortgage repayments, reducing disposable income and consumer spending. Explain that higher interest rates increase business borrowing costs, reducing investment and spending on stock or equipment. Explain that lower interest rates reduce borrowing costs and the reward for saving, encouraging consumer and business spending. Link changes in spending to demand for a business's products, sales revenue and profit. A common slip: Claiming that a rise in interest rates always increases spending. Instead, explaining that higher repayments usually reduce disposable income and spending. Exam tip: Distinguish clearly between the effect on consumers and the effect on businesses in separate sentences.
Key words
Say what each word means before you turn the card.
Consumer demand
Try answering aloud or in your head before turning the card.
Business investment
Try answering aloud or in your head before turning the card.
Confidence and debt levels
Try answering aloud or in your head before turning the card.
See every definition
- Consumer demand
- The amount of goods consumers buy, which falls when higher interest rates reduce disposable income and spending.
- Business investment
- Spending by firms on stock or equipment, which they cut when higher interest rates make overdrafts and loans cost more.
- Confidence and debt levels
- How much debt households and firms already hold and how confident they are, which determine the size of the effect of interest rate changes.
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