Jack: Inflation and Consumption Demand Essay

Submitted By 烊铭-张
Words: 621
Pages: 3

Adam Creighton, 2014, ‘RBA warns inflation could breach 3pc target’, The Australian, Accessed online: http://www.theaustralian.com.au/business/economics/rba-warns-inflation-could-breach-3pc-target/story-e6frg926-1226820513033 February 7th, 2014.
This article from February 2014 was about recent economic data and it discusses the inflation and the Reserve Bank of Australia’s role in varying the interest rates. RBA predicts that inflation would rise beyond the goal range of 2 to 3 per cent while economic growth remains weak and unemployment continues to increase.
The first concept that this article relates is Gross Domestic Product. GDP is the ‘market value of all final goods and services produced within a nation’s geographic borders during a period of time, usually a quarter or year’ (Layton, 2012). Expenditure Method is the most common approach to calculate GDP, which includes Consumption Demand, Government spending, Investment and Net exports. According to the article, the federal government will cut spending in the May budget, which will bring a decrease in GDP. In addition, the RBA said that there is a sharp drop in mining investment. This will lead to a fall in GDP, since the investment is a segment of GDP. Furthermore, the RBA added that the unemployment rate would keep a rising trend for several quarters because of the below-trend economic growth. Since GDP decreases, the bank see increase in unemployment rate which is a coincident indicator that can monitor the current performance of economy.
The article also relates to Aggregate Demand, which is different from the calculation for GDP. The spending of AD is at various different price levels, not the actual spending. According to the article, the interest rate in Australia is low and it has improved the housing market, parts of the construction industry and retail sales. When the interest rate decreases, the Consumption Demand and Investment Demand will increase. For consumption demand, the low interest rate causes the price level decrease and people will save less money to purchase variety of products. For investment demand, business could borrow much money to invest in inventories or construction industry with the low interest rate, which could create more profit.
From the above graph, an increase in non-price-level determinants of consumption and investment, which increases overall aggregate demand and shifts the AD graph. Moreover, the Bank declared that the exchange rate of…