Topic 3

Question 1

formula: income

Answer 1

y = C + I + G + (X - M)

Question 2

formula: equilibrium

Answer 2

S + T + M = I + G + X

Question 3

formula: K multiplier

Answer 3

1/ mps
1/ (1-mpc)
k: **only savings and investment considered

Question 4

formula: mpc

Answer 4

change of consumption / change of income

Question 5

formula: mps

Answer 5

change of savings / change of income

Question 6

formula: multiplier process

Answer 6

K x change of AD = change of gdp

Question 7

formula: gdp growth (% change)

Answer 7

gdp growth = (GDP2 - GDP1) / GDP1 x 100

Question 8

formula: real gdp growth

Answer 8

real gdp growth = (GDP2real - GDP1real) / GDP1 real

Question 9

formula: unemployment rate

Answer 9

unemployed/ labour force x 100

Question 10

Economic growth

Answer 10

an increase in the volume of goods and services due to increases in productive capacity
that an economy produces over a period of time.
time. It is considered to be the most important measure of an
economy’s performance as it creates employment which has a number of knock-on effects.

Question 11

Aggregate Demand (AD)

Answer 11

total demand for G&S within the economy over a given period of time
Y = C + S + T
S = I

Question 12

Aggregate Supply (Y)

Answer 12

the total goods and services produced by the economy, which generates the total level
of income in the economy over a given period of time (i.e. the potential output when all
factors of production are fully utilised)

Question 13

Equilibrium occurs when:

Answer 13

Y = AD and using substitutions,

S + T + M = I + G + X

Question 14

Components of AD

Answer 14

consumption
o Consumer expectations of future prices/incomes
o Interest rates
o Distribution of income (more equitable = more spent)

investment
o Business expectations
 Expected D
 Economic outlook
 Inflation
o Cost of capital
 Interest rates
 Government policies
 Cost and productivity of labour
 Cost of technology

government expenditure/taxation
o Fiscal Policy

exports less imports
o Exchange rates
o Consumer preferences

Question 15

AS can be increased through

Answer 15

o Discovery of new resources
o Population growth
o New skills
o New technology
o Increased efficiency (e.g. standardised shipping containers)

measures to improve efficiency
tackle capacity constraints:
o Skill shortages
o Infrastructure bottlenecks
o Dealt w/ using microeconomic policy
AS is necessary for strong medium to long-term growth

Question 16

Multiplier

Answer 16

the greater than proportional increase in national income resulting from an increase in
aggregate demand. It is an economic concept developed by Keynes that calculates the impact of an initial
change in autonomous expenditure on the equilibrium level of national income.

Question 17

Measurement of Growth through Changes in Real Gross Domestic Product

Answer 17

Measured by the annual rate of change in real GDP i.e. % increase value of G&S produced in an economy
over a period of time, adjusted for the rate of inflation.

Question 18

3 different time periods to measure

rate of Australia’s economic growth

Answer 18

Quarterly – highly volatile e.g. quarterly growth in the ‘March quarter’ is % increase in GDP since
previous December quarter.

Year-on-year growth – measures % change in GDP between one quarter and the corresponding
quarter of the previous year.

Annual economic growth – calculated each year using GDP statistics for the financial year (1st July –
30th June).

Question 19

2 sources of economic growth

Answer 19

aggregate demand and aggregate supply
An increases in AD tends to
lead to short-term economic growth whilst an increase in AS leads to long-term economic growth.

Question 20

Positives of economic growth

Answer 20

o Improvements in economic development
o Reduction in cyclical unemployment
o Government taxation

Question 21

Negatives of economic growth:

Answer 21

Higher rates of inflation (if capacity is reached, ^ demand only adds to inflation)
o Increase in income inequality
o Deterioration of environmental quality
o Worsening of the CAD (external stability)

Question 22

Macroeconomic policies

Answer 22

aimed to manipulate aggregate demand in order to stimulate economic growth.

Question 23

Fiscal policy

Answer 23

the use of the government budget as well as taxation in order to achieve economic objectives.

Question 24

Monetary policy

Answer 24

manipulating the cash rate to influence levels of aggregate demand.
Loose monetary policy is implemented to encourage business and consumer spending and investment e.g. during the GFC, the government reduced interest rates to 3%.

Question 25

Microeconomic reform

Answer 25

used to promote and sustain growth in the long term as it increases aggregate
supply.

Question 26

trends in business cycle

Answer 26

expansion (recovery), boom, recession and contraction

Australian economic growth slows, enters per capita recession:
Household spending remained weak, reflecting slower growth in employee pay and a small lift in household savings.
Nominal GDP is growing strongly, helping to boost government revenues. With the household sector clearly struggling, the case for providing some relief to this key area of the economy is strengthening.

Question 27

The Larger the MPS

Answer 27

the smaller the value of the multiplier because if individuals save proportionately more
of their extra income, they will spend less and thus, less national income