ExpertMedium2 marksMultiple Choice
ACCA · Question 05 · Syllabus A: Business organisation and its external environment
GlobalTrade is a cross-border multinational logistics firm. The central bank of their primary operating country has recently announced a significant increase in base interest rates to combat inflation.
What is the most likely direct macroeconomic impact of this policy on GlobalTrade?
GlobalTrade is a cross-border multinational logistics firm. The central bank of their primary operating country has recently announced a significant increase in base interest rates to combat inflation.
What is the most likely direct macroeconomic impact of this policy on GlobalTrade?
Answer options:
A.
The cost of borrowing for future expansion projects will increase.
B.
Consumer disposable income will increase, boosting demand for logistics.
C.
The country's currency will likely depreciate in the short term.
D.
Corporate tax rates will automatically decrease to offset the interest hike.
How to approach this question
Consider the direct effect of interest rates on corporate finance. Higher rates mean loans cost more.
Full Answer
A.The cost of borrowing for future expansion projects will increase.✓ Correct
An increase in base interest rates (monetary policy) makes borrowing more expensive for commercial banks, which pass this cost onto businesses. Therefore, GlobalTrade will face higher costs to finance expansion.
Common mistakes
Assuming higher interest rates boost consumer spending. They actually encourage saving and increase debt servicing costs, reducing spending.
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