AOS2

Question 1

Aggregate Demand Definition

Answer 1

Aggregate demand is the total expenditure on goods and services produced in the Australian Economy over a period of time

Question 2

Aggregate demand factors

Answer 2

• Consumer Confidence
• Disposable income
• Overseas economic activity
• Exchange rates

Question 3

How AD factors affect the economy

Answer 3

AD FACTOR
- Consumption Expenditure
-Aggregate Demand
-If D>S it causes demand inflationary pressures
- Economic activity
- Production of goods and services
- Economic Growth
-Derived demand for Labour
- Unemployment

Question 4

Aggregate Supply definition

Answer 4

Aggregate Supply refers to the total amount of goods and services available for sale in the Australian Economy

Question 5

Aggregate Supply factors

Answer 5

• Climatic Conditions
• Technological advancements
• Productivity growth
• Operating costs
• factors of production

Question 6

How AS factors affect the economy

Answer 6

AS FACTOR
-Profitability
- Willingness to produce goods and services
- Cost inflationary pressures
- Aggregate supply
- Economic activity
- production of goods and services
-Economic growth
- Derived demand for labour
- Unemployment

Question 7

Strong and Sustainable growth definition

Answer 7

To achieve the highest growth rate possible coupled with a strong rate of employment, but without running into any unacceptable inflationary, external or environmental pressures

Question 8

Strong and Sustainable growth measurement

Answer 8

The chain volume of GDP is used by the ABS to provide an estimate of real GDP in the economy. It involved taking the prices from the previous periods and applying them to current volumes. Real GDP is the market value of all goods and services production in Australia adjusted for inflation over a period of time.

Question 9

Material Living Standards

Answer 9

Total access to goods and services within the economy
- measured by GDP per capita and income per capita

Question 10

Non-material living standards

Answer 10

Refers to the quality of life/ value judgements:
- mental/physical health
- Environmental sustainability
- Crime rates
- literacy

Question 11

Full employment definition

Answer 11

To achieve the lowest unemployment rate possible without causing any excessive inflationary pressures.

• measured by NAIRU
• 4-4.25%

Question 12

Low and stable inflation definition

Answer 12

To achieve a stable increase in the general or average price level over a given period of time

Question 13

Underlying inflation

Answer 13

-Measurement of inflation that excludes one off or volatile circumstances
-Excluding is a form of adjustment
- Trimmed mean (top/bottom 15% off)
- Weighted median (middle out of all 100k goods/services)

Question 14

Consumer price index headline measure

Answer 14

CPI is the measure of the basket of all goods and services that represent the average metropolitan household (calculated quarterly)

Question 15

Cause of inflation #1

Answer 15

Demand inflation:
- The situation where the rise in the general price level over time is caused by excessive demand or spending pressures

Question 16

Cause of inflation #2

Answer 16

Cost inflation:
- The situation in which rises in the general price level over time are caused by cost pressures.
- Unless producers are willing to cut their profits or able to improve efficiency, costs of production are passed onto the consumer through higher prices

Question 17

Consequence of no full unemployment #1

Answer 17

Impact on GDP:
- Less disposable income
- Less spending/ economic activity
- Also represents spare capacity

Question 18

Consequence of no full unemployment #2

Answer 18

Impact on Tax revenue:
- Income tax is the governments largest source of revenue
- Higher unemployment means less tax revenue

Question 19

Consequence of no full unemployment #3

Answer 19

Impact of inflation:
- When unemployment is too low, greater disposable income, leading to more spending and hence higher inflation
- This causes labour capacity shortages, driving up prices

Question 20

Consequence for not achieving Strong and Sustainable economic growth #1

Answer 20

Excessive (>3.5%):
- Environmental degradation
- High inflation
- External pressures

Question 21

Consequence for not achieving Strong and Sustainable economic growth #2

Answer 21

Low (<3.5%):
- Reduce rate of growth in income
- impacts income per capita and material living standards
- less derived demand for labour

Question 22

Consequence of no low and stable inflation #1

Answer 22

Erosion of purchasing power:
-Decline in the real value of money
- reduction in real wages especially for low income earners

Question 23

Consequence of no low and stable inflation #2

Answer 23

Development of a wage price spiral:
- higher inflation
- decrease in real wage
- demand for increased wages
- increase cost inflation
- increase prices