Question

For each of the following, explain the impact of each event on the aggregate demand (AD), short run aggregate supply (SRAS) and long run aggregate supply (LRAS) of Malaysia:  

(i) It is announced that Malaysia has just entered into a recession.

(ii) The price of petroleum decreases by another 60%.

(iii) Political and social unrest in Indonesia have caused many foreign firms to relocate their business to Malaysia.

b) (i) State the endogenous and exogenous factors of economic growth.

(ii) Analyse how technological change affects productivity.  

c) Table 3 below shows the production patterns of computer chips and fuel injectors for Country Narnia and Somosa without an international trade. Both countries have equal allocations of resources between computer chips and fuel injectors’ productions.  

  

Computer chips Fuel injectors Country Narnia 6000 4000

Country Somosa 2000 4000

  

(i) Explain which country has the comparative advantage in producing computer chips.

(ii) Explain which country has the comparative advantage in producing fuel injectors.

Answer 1

i) When there is a recession in the economy, there is a fall in the aggregate demand of the entire economy. Thus under recessionary condidtions, the aggregate demand of the economy would fall, and the AD curve would shift leftwards, bringing down the price level and the output of the economy.

ii) Petroleum being a major raw material in the production and transaction of most of the commodities, with the decrease in the price of petroleum, the cost of production of the commodities would decrease eventually and this would cause an overall increase in the supply of commodities. The AS curve would shidt rightwards, bringing down the overall price level and increasing the output of the economy.

iii) As the forin investment in Malaysia increases, the aggregate demand would increase, as the investment component of the GDP is increasesing. This would shift out the aggregate demand curve. The overall price level nd output of the economy would increase.

b i) The exogeneous factors of economic development incluse among others the rate of technological advancement r progress.

The endogeneous factors include capital investment, policy decisions, and population growth.

ii) If there is a technological advancement in the economy, the production possibility frontier of the economy would shift out and would cause an increase in the production capacity of the economy.