Australian household consumption
Despite a cooling labor market, Australian household consumption rose by 4.2% in 2023. This unexpected resilience in consumer spending was largely attributed to a strong wealth effect as metropolitan property prices surged, alongside a drawdown on pandemic-era household savings. This rise in consumption occurred despite elevated inflation and successive interest rate hikes by the Reserve Bank of Australia.
To sustain this level of lifestyle spending, many households have increasingly turned to buy-now-pay-later (BNPL) schemes and personal lines of credit. Total household debt-to-income ratios have reached historic highs, raising concerns among financial regulators about systemic risks and the vulnerability of heavily leveraged households to further interest rate increases. Economists warn that if consumers are forced to deleverage, it could lead to a sharp contraction in aggregate demand.
Assess the likely impact on the Australian economy of an 'increase in consumption' (Extract A, paragraph 1). Use an aggregate demand and aggregate supply diagram in your answer.
40 exam-style questions on Edexcel A A Level Economics 2.2.2 Consumption (C). Each one has a worked solution and a mark scheme showing where the marks go.