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Using the data in Extract G and your own business knowledge, assess the likely effects of the changes in interest rates between 2019 and 2021 on Buy it Direct. - Edexcel - A-Level Business - Question 2 - 2022 - Paper 2
Question 2
Using the data in Extract G and your own business knowledge, assess the likely effects of the changes in interest rates between 2019 and 2021 on Buy it Direct.
Worked Solution & Example Answer:Using the data in Extract G and your own business knowledge, assess the likely effects of the changes in interest rates between 2019 and 2021 on Buy it Direct. - Edexcel - A-Level Business - Question 2 - 2022 - Paper 2
Step 1
Positive effects on Buy it Direct:
Answer
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Lower Borrowing Costs: Interest rates fell from 0.75% in 2019 to 0.1% in 2021. This reduction in borrowing costs allows Buy it Direct to borrow money at lower rates, which can increase their capital for investment in projects like expanding their bathroom division or offering more competitive prices on household appliances.
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Increased Consumer Demand: The lower interest rates may stimulate demand for big-ticket items. Consumers are likely to feel more financially secure and could be encouraged to spend on household appliances and consumer electronics, increasing sales for Buy it Direct.
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Investment Encouragement: Buy it Direct might also consider investing in innovative products or technologies, thanks to the lower costs associated with borrowing. This could enhance their product offerings, making them more appealing in a competitive market.
Step 2
Possible Counterbalance:
Answer
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Reduced Rewards for Savers: The significant drop in interest rates may mean lower returns for savers. This could lead to reduced purchasing power for some consumers, limiting their ability to buy more expensive household items like those offered by Buy it Direct.
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Impact on Supply Costs: Buy it Direct could face increased supply costs due to inflation or changes in the global market impacting the cost of imported items, especially if the depreciation of the currency offsets the benefits gained from lower interest rates.
Step 3
Potential Judgment:
Answer
While the fall in interest rates from 0.75% to 0.1% between 2019 and 2021 is significant, the actual impact on Buy it Direct might be limited given this modest change (only 0.65%). The company may experience some benefits from lower borrowing costs and increased consumer confidence, but these effects will need to be balanced with the counteracting factors that could limit the overall growth and profitability during this period.