Determinants of Agg Expenditure

Question 1

what are the 5 factors affecting consumption spending (LSCCG)

Answer 1

1. level of disposable income
2. stock of household wealth
3. cost of credit
4. consumer expectations
5. government policies

Question 2

(factors affecting consumption spending) explain level of disposable income and how it affects consumption spenidng

Answer 2

households spend more on consumption when they have higher levels of income

Question 3

(factors affecting consumption spending) explain cost of credit if there are LOWER interest rates

Answer 3

lower interest rates = pos effects on agg consumption
when interest repayments fall, a smaller slice of income is taken out and the op cost of exp falls so saving is less attractive because they will recieve lower interest on the saved funds

Question 4

(factors affecting consumption spending) explain cost of credit if there are HIGHER interest rates

Answer 4

higher interest rates = neg effects on agg expenditure
repayments take up a larger proportion of income therefore op cost of consumption is higher as households forego the higher return from ‘saving’ surplus cash with banks

Question 5

(factors affecting consumption spending) explain stock of household wealth and how it affects consumption spenidng when it is value high and when value is low

Answer 5

households that hold property/shares feel more wealthy when value of assets rises and therefore are more liekly to spend on durables

households delay major consumption decisions or reduce discretionary spending

Question 6

(factors affecting consumption spending) explain consumer expectations and how it affects consumption spenidng

Answer 6

expectations are shaped by economic events (news, interest rates. effects discretionary luxuries not basic commodities

Question 7

(factors affecting consumption spending) explain government policies and how it affects consumption spenidng

Answer 7

gov has the power to get revenue through tax and spend those taxes which affects households
monetary policy affects cost of credit

Question 8

(investment expenditure) what is private investment and why is it so volatile

Answer 8

priv investment = expenditure on producer and capital goods that are used to produce final goods and services in the future.

Question 9

(investment expenditure)why is it so volatile

Answer 9

priv investment has swung between 16% and 23% of GDP in the last 50 years due to risk of failure. political decisions, international events and changes in consumer taste influence risk and so investment rises and falls according to perceived risk

Question 10

(investment expenditure) what are the 4 factors affecting investment expenditure (RGBP)

Answer 10

1. Rate of Interest
2. Government Policy
3. Business Expectations
4. Profitability

Question 11

(investment expenditure - rates of interest) explain why there is an inverse relationships between rate of interest and ivnestment expenditure

Answer 11

the higher the interest rates the less investment expenditure. when interest rates are higher capital purchased with borrowed funds is worth more

Question 12

(investment expenditure - rates of interest) explain the opportunity cost of interest rates using an example

Answer 12

interest rates involves the op cost of money over investment. when interest rates are high, firms forego other investment
eg if IR on borrowed funds is 12%, rate of return from capital investment should be >12% to be wise

Question 13

(investment expenditure - rates of interest) what is the difference between nominal and real rates of interest (explain an example)

Answer 13

nominal - current price of borrowed money
real - takes the rate of inflation into account

if nominal interest rate is 8% and inflation is 4% the real rate of interest is 4% (8-4)

Question 14

(investment expenditure - business expectation) explain what positive and negative business expectatons are

Answer 14

pos - future sales/ profit and investment will increase

neg - reduction in planned investment

Question 15

(investment expenditure - profitability) explain hwo profatibility can influence investment expenditure

Answer 15

firms retain a proportion of profit that they can then invest to purchase land and expand. if profatibility is low equipment can be run down

Question 16

(investment expenditure - profitability) explain how the technological process is emodied in capital items

Answer 16

firms invest to take advantage of lower costs of production that the equipment can offer. investment is more efficient and can lower production cost

Question 17

(investment expenditure - government policy) explain how fiscal and monetary policies affect investment expenditure

Answer 17

they affect business costs (tax) and the general level of economic activity

Question 18

(investment expenditure - government policy) explain how some gov policies can have direct impacts on ivestment

Answer 18

• the gov could offer inventives for businesses to invest (subsidies, taxes allowance, overseas trade promo) in a period of low economic activity
• gov regulation can affect market structure, competition, availibility of funds for investment and teh cost of doing business

Question 19

(investment expenditure - government policy) explain how the government itself has invested

Answer 19

the government has invested in infrastructure that benefit the future (schools, roads etc).
they often partner with private firms to develop such profitable utilities capable of funding themselves

Question 20

(government expenditure) explain why gvoernment expenditure is farily stable giving an example of its stable investments

Answer 20

it is shaped by non economic factors (social + political)

gov programs in health, education, welare

Question 21

(government expenditure) explain when gov expenditure is unstable with an example

Answer 21

if welfare payments increase when economy is in trough because cyclical unemployment increases - the gov has to change tax/exp to manage this
for example the gov would decrease investment subsides if the economy was booming

Question 22

(imports and exports) explain why import/export exp is so volatile

Answer 22

because AUs has high intesity of trade and is a ‘small open economy’

Question 23

(imports and exports) explain 2 influences on exports with a real life example of each

Answer 23

• economic conditions in Aus and the world affect commodity demand (aus mineral high in demand as india/china urbanise)
• domestic agricultural production rises and falls due to seasons (eg drought)

Question 24

(imports and exports) explain 3 influences on imports with a real life example of each

Answer 24

• domestic levels of econ activity influence Aussie inclination to import
• imports seem elastic to GDP (if gdp rises by 5%, imports rise by 10%)
• in period of high econ activity, consumers import gods which can’t be sourced locally and buy equipment not available domestically

Question 25

(net exports) what are the 5 factors affecting net exports (tcode)

Answer 25

1. domestic business cycle
2. overseas business cycle
3. exchange rate
4. comodity prices
5. terms of trade

Question 26

(net exports - exchange rates) explain what deterines exchange rates and what happens to net exports when AUD appreciates and depreciates

Answer 26

determined by demand and supply
appreciation of AUD = decrease net exports (imports are cheaper but exports are expensive)
depreciation of AUD = increase net exports (exports are cheaper and imports more expensive)

Question 27

(net exports - terms of trade) what are terms of trade

Answer 27

ratio of export price to import price

Question 28

(net exports - terms of trade) explain what happens when TOT rises and falls

Answer 28

rise = vlaue of net exports rises (export sold higher)
fall = value of net exports will fall (exports sold loewr)