Nature of the Economy

Question 1

What influences economic performance?

Answer 1

Gross Domestic product (GDP)
Consumer price index (CPI)
Gross National Income (GNI)
Labour force: Size, growth, unemployment.

Question 2

What do economies want?

Answer 2

Growth through spending- Consumer, business, other countries and government spending. The more people spend the more the economy flows.

Question 3

What does the 5 sector flow do

Answer 3

helps to visualise how money moves through the economy and the connections of sectors within this as well as where injections and leakages in the economy occur.

Question 4

What happens when Leakages are greater then injections?

Answer 4

the economy will experience an economic decline because money is sitting in banks and still other places so it is not flowing in the cycle.

Question 5

What happens when injections are greater then leakages

Answer 5

There will be more economic growth and the economy will expand thus why economies want spending because it keeps the cycle moving.

Question 6

What are the five sectors of the economy?

Answer 6

Consumers (household sector)
Businesses (Firms sector)
Financial institutes
Governments
Overseas

Question 7

Draw the 5 sector flow model

Answer 7

…

Question 8

What is inflation?

Answer 8

Prices going up in things such as groceries and petrol. This is not good. During Covid we had bad inflation because everyone was inside so businesses were losing money leading them to need to up their prices. People couldn’t afford this so the government handed out stimulus packages. During inflation economies want good employment. The more people employed the better.

Question 9

What is the monetary policy?

Answer 9

The monetary policy is a set of tools the RBA creates to help the economy to ensure economic stability and growth through controlling things such as interest rates.

Question 10

Define trade off

Answer 10

A person gives up the opportunity to buy ‘good B,’ because they want to buy ‘good A’ instead. Fort example I want to buy a car but I stumble across a really cute top, I could buy the top but then I would have les money to save for my car so I decide not to buy the top so that later down the track I can afford the car.

Question 11

What is a Marco economy?

Answer 11

Macro economy is a large economic scale. It is essentially branches of the economy that looks at structure, performance, decision making etc.

Question 12

What is interest/ interest rates?

Answer 12

Interest is a payment from a borrower to the lender as a trade for the borrowing. When you borrow money you then have to pay back the same amount (principal) as well as (interest) on top of that. An interest rate is the percentage of the principal amount that you are required to pay back for example if the interest rate is 10% and you are borrowing $100 you then pay the lender $110.
Example- The bank pays interest to the RBA (Reserve Bank of Australia) and then borrowers from the banks interest rate will be slightly higher then the interest rate that the bank pays the RBA so that the bank makes money. Interest rate depends on a few things for example a car will have a higher interest rate than a house because the car can drive off. Essentially if you borrow money you have to pay back that money (principal) as well as (interest). You have to pay more money for something if you get a loan because the interest added on.

Question 13

Define and Describe the Firm sector

Answer 13

firm sector comprises of businesses
buy resources from the household
firms receive resources from the household sector and provide income in return such as wages interest profit.

Question 14

Define and describe the financial sector

Answer 14

The financial sector refers to financial institutes such as banks and superfunds
Acts as a link between the savers and the borrowers in the economy- they receive the savings of savers and borrow it out to borrowers (investment) they are investing others money into other people.
This investing is responsible for injecting money into the economy after it has been leaked.

Question 15

Define and describe the government sector

Answer 15

The government sector consists of federal, state and local governments. This sector is responsible for Taxation (from businesses and individuals when they receive profit and income) - leakage in the economy as well as government expenditure (healthcare, transport, education, stimulus packages)- injecting into the economy

Question 16

Define and describe the overseas sector

Answer 16

The overseas sector is responsible for imports and exports. Exports and an injection into the economy whilst imports are a leakage. Australia exports coal, wheat and meat whilst we import cars, electrical machinery etc.

Question 17

Explain the 3 main leakages and injections

Answer 17

Leakages= money leaving the economy

Savings (S)
Taxation (T)
Imports (I)

Injections= money entering the economy

investment (I)
Government expenditure (G)
Exports (X)

Question 18

What is ASIC and what do they do?

Answer 18

Australian Securities and Investment commission.

In charge of monitoring the financial services industry which includes investment advice.

They provide consumer protection and financial services- shares, managed funds, superannuation, insurance and credit and deposit taking.
enforce legislations such as corporations act of 2001

Question 19

What is the role of Governments in protecting consumers

Answer 19

Register and license- register financial service providers, maintain publicity, grant Australian financial services

Regulate- intervene to ban defective products, make legislative rules to ensure financial market integrity, grant relief from legislation

Enforce- Investigate suspected breaches, issue infringement, seek civil penalties, ban individual activity

Question 20

What is the role of the financial sector in facilitating Business investment

Answer 20

The business sector is an intermediary between businesses and the household sector. Through this the financial sector (banks) take money from the household people when they put their money into savings and then lend it out to businesses who want to invest in the expansion of other businesses.

Question 21

How do businesses finance their investments?

Answer 21

Dept and equity are the two major sources of financing for businesses.

Question 22

What is dept financing?

Answer 22

Dept financing is when a company borrows money to be payed back at a future date with interest.

Question 23

What is equity financing?

Answer 23

equity financing means exchanging a portion of the business in exchange for a financial investment in the business

Question 24

What are the different governments?

Answer 24

Local government, state government, federal government

Question 25

What is meant by the term “mixed economy”

Answer 25

A mixed economy is where businesses and individuals make their own decisions with a degree of government involvement.

Question 26

What happens if the line on the demand curve moves to the right and why would this happen?

Answer 26

This means prices are increasing for a product. This may happen due to population growth (more demand)
rise in consumers income