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. [10 marks]
(b) Firms have begun to use more high-tech machineries for production. [10 marks]
(c) The Malaysian government has decided to spend on a major revamp of the public transportation system. [10 marks]
(d) Malaysian higher education system has produced highly skilled employees. [10 marks]

Answer 1

SOLUTION:-

(a) Consumers are worried with the country's economic progress. This indicates that they are likely to spend less now and save more for the gloomy future. Less consumption results in reduced aggregate demand and so AD shifts to the left. As this shift occurs, price level falls and there is a decline in the real GDP as well

(b) Firms have begun to use more high-tech machineries for production. This raises productivity so that firms produce more goods and services with same resources. This results in increased aggregate supply and so AS shifts to the rights. As this shift occurs, price level falls and there is an increase in the real GDP.

(c) The Malaysian government has decided to spend on a major revamp of the public transportation system. More government spending results in increased aggregate demand and so AD shifts to the right. As this shift occurs, price level rises and there is an increase in the real GDP as well.

(d) Malaysian higher education system has produced highly skilled employees. This raises labor productivity so that firms produce more goods and services with same labor force. This results in increased aggregate supply and so AS shifts to the rights. As this shift occurs, price level falls and there is an increase in the real GDP.

THANK YOU

If any quearies please leave your valuable comment on comment box..........