Unit 1 Area of Study 2

Aggregate Demand Factors

Aggregate Demand Factors

Inflation: The rise in price of goods and services over a period of time. A healthy amount is around 2%.

Unemployment: The amount of people, usually a percentage, who are out of work and actively seeking work. A healthy amount is around 5%.

Interest Rates: The percentage of money charged for its use.

Three Terms to Know:

Aggregate Demand Factors

Aggregate Demand Factors

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

C= Consumer Spending: Household spending that is designed to help satisfy our needs and wants

I= Private Investment Spending: Spending by businesses on machinery and building used to help make other goods and services

G= Government Spending: Government outlays that are designed to help meet the needs and wants of the community

X= Exports: The amount spent by people overseas on Australian-made goods

M= Imports: The amount spent by Australians on foreign-made goods and services

Aggregate Demand Factors

Aggregate Demand Factors

Aggregate Demand FactorsConsumer Spending can be affected by:

a. Disposable Income- Money that is available for spending after things like

tax

b. Consumer Confidence- Optimism about future household income and

employment future

c. Interest Rates- Higher rates encourage saving, lower rates encourage

spending

d. Rate of population growth- Immigration can lift consumption

e. Budgetary policies – Decisions such as cutting income tax

Aggregate Demand FactorsPrivate Investment Spending

a. Business Confidence- The willingness of

business to invest in new plant and

equipment

b. Interest Rates

c. Company tax rates- Money paid to the

government by firms on income

Aggregate Demand Factors

Government Spending

a. Unemployment- As unemployment rises, so does (G)overnment

spending

b. Inflation- Governments will tailor their spending to help combat

inflationary pressures

c. Population Growth- As the population grows, so will

government spending

d. Political- Election promises or political pressures may cause

government spending to increase or decrease

Aggregate Demand Factors

Exports

a. The exchange rate- If the Australian Dollar is worth more,

foreign buyers will be able to purchase less Australian goods

b. Overseas economic conditions- Recessions or booms in other

countries will increase the demand for Australian goods

c. Natural disasters/Severe weather events- Disasters in

Australia or overseas will affect the demand for our products

Aggregate Demand FactorsImports

a. The exchange rate- A rise in $AUD will make foreign goods more attractive.

b. Local economic conditions- A local boom makes foreign goods more

attainable.

c. Consumer Confidence locally- Higher confidence in the economy will lead to

more purchases of overseas goods.

d. Inflation Rate- A higher inflation rate in Australia will make foreign goods

more attractive

Aggregate Demand Factors

Questions:

Check your understanding pg. 76 #4

Applied Economic Exercises pg. 95 #4 (Except #1),