2.6,2.7,2.8

What is the formula for Aggregate Demand (AD)?

• AD = C + I + G + X + M

• AD = C + I + G1 + G2 + (X – M)

• AD = C + G + I – X + M

• AD = C + I + G1 + G2 – (X + M)

Which of the following is the largest component of Aggregate Demand (AD) in Australia?

• Private Investment (I)

• Government Consumption (G1)

• Private Consumption (C)

• Net Exports (X – M)

Private investment (I) includes spending on:

• Household goods and services

• Business capital such as equipment and buildings

• Public infrastructure like roads and hospitals

• Government employee salaries

Government investment (G2) refers to:

• Spending on wages for public sector employees

• Capital spending on infrastructure like schools and hospitals

• Payments for social security benefits

• Exports of goods and services

If Australia’s imports exceed its exports, the net effect on Aggregate Demand (AD) will be:

• Positive, because imports increase domestic spending

• Negative, because imports reduce net overseas expenditure

• Neutral, because imports and exports always balance

• Unpredictable, depending on government policy

An increase in consumer confidence is likely to:

• Decrease Aggregate Demand

• Increase Aggregate Demand

• Have no effect on Aggregate Demand

• Decrease government spending

How do interest rates affect Aggregate Demand?

• Higher interest rates encourage borrowing and increase AD

• Lower interest rates discourage borrowing and decrease AD

• Higher interest rates reduce borrowing and decrease AD

• Interest rates have no impact on AD

If the Australian dollar depreciates relative to other currencies, what is the likely impact on Aggregate Demand?

• AD increases due to higher exports and lower imports

• AD decreases due to lower exports and higher imports

• AD remains unchanged

• AD decreases due to lower government spending

What happens when Aggregate Demand strengthens?

• GDP growth slows down

• Unemployment rises

• Prices may rise due to demand inflation

• Business confidence declines

What is a possible consequence of weaker Aggregate Demand?

• Higher economic growth

• Lower unemployment

• Falling production and rising stock levels

• Rising demand inflation