The Relationship Between Components Of Aggregate...

This report will examine the relationships between components of aggregate expenditure and how fluctuations in those components eventually leads to changes in monetary policy. The recent performances of the Australian economy over the past five years will be examined in order to provide an assessment on where this economy currently is on the business cycle. This will be done through discussing the relevant economic models, such as aggregate demand and aggregate supply. Providing a critical analysis of these models will assist in understanding the establishment of certain policies due to fear of implications. Understanding the relationship between government policies and their effect on the GDP directly influences the business cycle. In order to assess where the Australian economy is in the business cycle, it is necessary to examine to the main expenditure components – household consumption, net investment which includes inventories along with private and public investment, government expenditure, and net exports (Makin, 2010, p. 9). Figure 1 illustrates the growth rate of real GDP of the past five years seasonally adjusted, while figure 2 shows the growth rate segmented into the components that cause GDP growth. There are a number of trends that these graph illustrate, and it is important understand their effect on aggregate demand. 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