Unit 2 AOS 1 Sac Flashcards
What are the components of Aggregate Demand
Aggregate demand is the sum of four components: consumption, investment, government spending, and net exports.
Q2: An improvement in technological development is likely to:
Shift the Aggregate Supply curve to the right, decrease inflation, and increase Gross Domestic Product.
Explain one limitation of using real GDP to measure changes in living standards.
One limitation of real GDP is that it does not consider the value of all economic activities, such as those in the black market or non-marketed goods, which may lead to an understatement of the economy’s true output and, consequently, living standards.
Q10: Analyze the likely impact of the trend in interest rates on aggregate demand, economic activity, inflation, and unemployment.
The increase in interest rates has likely led to decreased household and business spending, reducing consumption and investment, and consequently lowering aggregate demand and GDP growth. This decline in demand for goods and services has likely increased unemployment and decreased inflation as businesses reduce prices to stimulate spending.
Explain how a rapid increase in economic growth may benefit living standards of society.
A rapid increase in economic growth can lead to higher demand for goods and services, resulting in more jobs and higher disposable incomes, improving access to goods, services, health programs, and overall quality of life.
Explain how a rapid increase in economic growth may be detrimental to the living standards of society.
A rapid increase in economic growth can harm living standards by causing inflation, which reduces purchasing power and material living standards. It can also lead to environmental degradation, such as pollution and resource depletion, which negatively impacts non-material living standards. Additionally, rapid growth may increase income inequality and overwork, leading to stress and a decline in mental and physical health, further reducing both material and non-material living standards.
What is one economic factor that has impacted consumption over the past two years?
One significant economic factor is the rise in interest rates, which have increased from near-zero levels to over 4% during the past two years. This increase in interest rates leads to higher borrowing costs for households, reducing disposable income and, subsequently, consumer spending. As a result, the Aggregate Demand (AD) curve shifts to the left since consumption, a major component of AD, decreases.
Q: Explain one economic factor and how it has impacted net trade over the past two years.
The global economic slowdown has been a key factor affecting net trade over the past two years. As global demand for exports has weakened, Australian export volumes have declined, negatively impacting export-dependent industries. This reduction in net exports, which is a component of Aggregate Demand (AD), causes the AD curve to shift leftward, indicating a decrease in overall economic activity.
Q: Explain one economic factor and how it has impacted the cost of production over the past two years.
Rising energy prices have been a significant factor impacting the cost of production over the past two years. As energy costs increase, firms face higher production costs, which can reduce their profitability. This situation can cause a leftward shift in the Aggregate Supply (AS) curve as the higher costs make production less profitable, reducing the overall supply of goods and services in the economy.
Q: Explain one economic factor and how it has impacted the quantity and quality of resources over the past two years.
Investment in technology has been a crucial factor affecting the quantity and quality of resources. Over the past two years, advancements in technology have improved the efficiency and productivity of resources. This improvement enhances productive capacity, leading to a rightward shift in the Aggregate Supply (AS) curve as more goods and services can be produced with the same amount of resources.
Q: Explain why the goal of strong and sustainable economic growth is between 3-3.5% real GDP per annum, and not above or below.
The goal of achieving 3-3.5% real GDP growth per annum is considered optimal because it represents strong economic growth without leading to unsustainable levels. Growth below this range would indicate insufficient economic activity, potentially leading to higher unemployment and lower living standards. On the other hand, growth above this range could result in overheating of the economy, leading to high inflation and environmental degradation, which are not sustainable in the long term.
Q: Describe one consequence in detail that could reduce living standards if economic growth is too strong, referring to both material and non-material living standards.
If economic growth is too strong, it can lead to significant inflation, eroding the purchasing power of consumers and negatively impacting material living standards as people can afford fewer goods and services. Additionally, rapid growth often leads to environmental degradation, increased stress, and reduced work-life balance, which adversely affect non-material living standards, such as mental and physical well-being.
Explain how the exchange rate can impact both Aggregate Demand (AD) and Aggregate Supply (AS), examining the impact of an appreciation of the AUD.
An appreciation of the Australian dollar (AUD) makes Australian exports more expensive and imports cheaper. This can lead to a decrease in net exports, reducing Aggregate Demand (AD) as export volumes fall. On the supply side, cheaper imported goods may lower production costs for firms that rely on imported materials, which could potentially increase Aggregate Supply (AS) by reducing the cost of production.
Q: Propose and justify which stage of the business cycle Australia is currently in, referring to the three key lagging indicators.
Australia appears to be in the recovery stage of the business cycle, characterized by improving economic conditions following a downturn. This is evidenced by key lagging indicators: unemployment is gradually decreasing, inflation is stabilizing after a period of deflationary pressure, and economic growth is picking up as reflected in the GDP data. These indicators collectively justify the conclusion that the economy is recovering.
Q: Explain one alternative measure to GDP for measuring living standards, and describe how it can overcome the limitations of GDP as a measurement.
The Human Development Index (HDI) is an alternative measure to GDP for assessing living standards. Unlike GDP, which only measures economic output, the HDI incorporates health, education, and income dimensions, providing a more comprehensive view of well-being. It addresses the limitation of GDP by considering non-material aspects of living standards, such as life expectancy and education quality, which are crucial for overall societal well-being.
