Question

Using the aggregate demand and aggregate supply model, explain the effects of the following on price and real income in Malaysia.
(a) Consumers are worried with the country’s economic progress.

(b) Firms have begun to use more high-tech machineries for production.

(c) The Malaysian government has decided to spend on a major revamp of the public transportation system.

(d) Malaysian higher education system has produced highly skilled employees.

Answer 1

Answer a) The aggregate demand will fall and aggregate demand curve will shift to the left amd aggregate supply will remain unchanged.

When the consumer's are worried about economic progress of the country then they will loose confidence on the government as a result they will try to save more as compare to spending due to which the aggregate demand will fall in the economy.

The Price and real income both will fall.

Answer b) The aggregate supply curve will shift to the right and the Aggregate demand curve will remain unchanged.

Due to use of high tech machinery in Production more output can be produced with same efforts and hence the cost of production will fall. With a fall in the cost of production the profit of producers will rise thus profit maximising and cost minimising producers will increase the supply . Thus the Aggregate Supply curve for the economy will shift to the right.

The Price will fall and the real income will rise.

Answer c) The aggregate demand will increase and the aggregate demand curve will shift to the right and the Aggregate Supply will remain unchanged.

This is because Aggregate demand= Consumption+ Investment+ Government expenditure+ Net Exports. With a rise in government spending for revamping transportation the Component Government expenditure of aggregate demand will rise and hence the aggregate demand will rise and the curve will shift to right.

The Price and real income will rise.

Answer d) The Aggregate Supply curve will shift to the right and the Aggregate demand curve will remain unchanged.

This is because due to increase in the efficiency of workers now more output can be produced with same amount of efforts. This will fall the cost of production and will rise the Profits of the firm. Profit maximising producers will thus Increase the supply and Aggregate Supply curve will shift to the right.

The price will fall and the real income will rise.