Quick questions on Aggregate demand and aggregate supply factors (VCE Economics Unit 3)

AS factors operate on the productive capacity of the economy.

The VCE answer style requires explicit cause-and-effect chains. Examples:

Measured by the Westpac-Melbourne Institute Consumer Sentiment Index. Higher confidence raises consumption (C), shifting AD right.

Consumer sentiment fell to recession-era lows during the 2022-23 RBA tightening cycle, weighing on retail spending. It has recovered modestly in 2024-25 as inflation has eased.

Measured by the NAB Business Confidence Index. Higher confidence raises investment (I).

The cash rate flows through to mortgage, business loan and deposit rates. Higher rates: - Reduce mortgage holder disposable income (mortgage repayments rise). - Make borrowing-financed consumption and investment more expensive.

After-tax household income. Driven by: - Wages and salaries (the Wage Price Index). - Income tax (Stage 3 cuts from 1 July 2024 raised real disposable income by around 1 percent of GDP).

AUD movements affect net exports (X - M): - AUD depreciation raises export competitiveness and makes imports more expensive, supporting AD. - AUD appreciation has the opposite effect.

Federal, state and local government spending (G). The 2020-21 COVID-19 stimulus was the largest fiscal expansion in Australian peacetime history. The 2024-25 Budget tightened the structural position.

Demand from trading partners. Australia's exports are sensitive to: - Chinese GDP growth (32 percent of exports). - Japanese, South Korean and ASEAN demand (combined around 35 percent).

Higher population (driven by net overseas migration around 500,000 in 2023-24) raises consumption and housing demand, shifting AD right.

Output per unit of input. Multifactor productivity in Australia has averaged 0.5 percent per year over the last decade, well below the 1.5 percent of the 1990s. Drivers: - Technology adoption.

Higher taxes on production and stricter regulation shift AS left. Microeconomic reform (NCP 1995, tariff reductions) shifted Australian AS right.

Investment in machinery, infrastructure, R&D and intellectual property. Mining investment was the swing factor of the 2003-2014 boom. Infrastructure investment (Snowy 2.0, Inland Rail, Western Sydney Airport) is a current driver.

Australia's mineral and energy endowment underpins its production capacity. Climate and biodiversity affect long-run capacity (climate-related extreme weather, droughts).