Economic Issues

Boom. Economy growing rapidly. High consumer spending; high employment; firms expanding; rising prices (inflation risk).

Recession. Economy contracting (technically two consecutive quarters of negative GDP growth). Falling spending, rising unemployment, falling profits, business failures.

Slump (depression). Severe and prolonged recession. Very high unemployment; widespread business failures; consumer confidence collapses.

Recovery. Economy starts growing again. Spending rises, employment increases, businesses cautiously expand. Builds toward the next boom.

Different strategies for different stages.

• BOOM: invest cautiously (avoid overheating), watch margins, prepare for the next downturn.
• RECESSION: conserve cash, cut non-essential costs, delay big investments, retain key staff.
• SLUMP: focus on survival; protect cash; reduce inventory.
• RECOVERY: invest early in expansion, recruit talent, capture market share.

Cambridge tip. Mark scheme rewards naming all four stages PLUS what each means for businesses.

Inflation. Rising prices over time. Reduces purchasing power.

Effects on businesses:

• Rising costs (raw materials, wages, energy).
• Falling REAL demand (customers' real income falls).
• Higher interest rates (central banks fight inflation).
• Pricing complexity — when to raise prices?

Unemployment. When willing and able workers can't find jobs.

Effects:

• HIGH unemployment → lower consumer spending → lower demand.
• HIGH unemployment also → cheaper labour → some firms benefit on the cost side.
• LOW unemployment → tighter labour market → wages rise → cost pressure.

Interest rates. Set by the central bank to manage the economy.

Effects:

• HIGHER rates → loans more expensive → investment slows.
• HIGHER rates → mortgage costs up → consumer spending falls.
• HIGHER rates → currency typically appreciates → exports dearer, imports cheaper.
• LOWER rates → opposite of all above.

Cambridge tip. Mark scheme expects students to identify the DIRECTION of effect (up or down) AND the mechanism (why).

Exchange rates affect every importer and exporter.

SPICED memory aid. Strong Pound: Imports Cheaper, Exports Dearer.

Strong domestic currency.

• Imports CHEAPER (good for importers; lower input costs).
• Exports DEARER in foreign markets (bad for exporters; sales fall).
• Inflation may FALL (cheaper imports).

Weak domestic currency.

• Imports DEARER (bad for importers; raw-material costs rise).
• Exports CHEAPER abroad (good for exporters; sales rise).
• Inflation may RISE (more expensive imports).

Why exchange rates change. Interest-rate differences, trade balances, market sentiment, central-bank intervention, geopolitics.

Hedging. Firms can use forward contracts and derivatives to lock in exchange rates and reduce uncertainty.

Cambridge tip. Mark scheme accepts SPICED as a memory aid. The key skill is applying it to the SPECIFIC firm (exporter or importer) in the question.

Fiscal policy — tax and government spending.

• Expansionary fiscal: cut taxes, increase government spending → boost demand. Used in recessions.
• Contractionary fiscal: raise taxes, cut spending → cool overheating economy. Used during high inflation.

Monetary policy — central bank's interest rates and money supply.

• Expansionary monetary: cut interest rates, increase money supply → cheaper borrowing, more spending and investment.
• Contractionary monetary: raise rates, reduce money supply → reduces inflation, slows demand.

Effects on businesses.

• Lower taxes → more disposable income for customers, more retained profit for firms.
• Higher government spending → opportunities for suppliers and contractors (especially in infrastructure, defence, healthcare).
• Higher interest rates → more expensive borrowing, lower demand.
• Lower interest rates → easier finance, more investment.

Cambridge tip. Don't confuse the two policies — fiscal is GOVERNMENT (tax + spend); monetary is CENTRAL BANK (rates + money supply).