ASRJC H1 econs CSQ2 2021 Suggested Answers

N2021 H1 CSQ 2 – Economic issues in Malaysia (a) (i) Explain the meaning of ‘real’ in the term ‘annual percentage change in real GDP’. [2] Real GDP means that inflation has been accounted for [1m] and it refers to the change in total money value of all final goods and services produced within a country’s geographical boundary during a period of time measured by actual change in the volume of output [1m]. (ii) Using Table 1 and Table 2, identify the main features of Malaysia’s economic growth performance, both over time and compared with the other given Asian economies. [4] Overall, Malaysia registered positive economic growth from 2007 to 2018, except for the year 2009 when it experienced negative growth. [1m] However, a lthough growth was positive, real GDP had increased at a decreasing rate from 6.3% to 4.7%. [1m] Based on Table 2, Malaysia’s economic growth was forecasted to be higher than Thailand and the advanced economies in Asia, such as Japan, Korea and Singapore [1m], but lower than the other developing economies in Asia. [1m] OR Based on Table 2, Malaysia’s economic growth rate was forecasted to slow down from 2018 to 2019, along with other Asian economies [1m], except for Indonesia where economic growth rate was expected to increase [1m]. In fact, Malaysia and Japan’s economies were projected to fall in the most among the Asian economies. (b) Using AD/AS analysis, explain how variations in consumption could cause variations in the levels of unemployment and inflation in Malaysia during the period 2008–2010. [6] From 2008-2009, there was a rise in unemployment and a fall in inflation rate. This could be due to the conflict that exists between economic growth, employment and inflation . When consumption falls due to pessimistic outlook in the economy, there will be a fall in AD from AD0 to AD1. This causes a rise in surplus or unplanned stock accumulation s. Firms will produce lower output in the next period, causing production and real national output to fall from Y0 to Y1. Derived demand for workers fall, resulting in a rise in demand deficient unemployment. The unplanned stock accumulation will cause producers to drive down prices in order to clear surpluses, leading to a fall in demand-pull inflation from P0 to P1, as seen in the levels of unemployment and inflation in Table 1 during the period from 2008 to 2009.

On the other hand, unemployment rate fell but inflation rate rose f rom 2009-2010. This could be due to a n increase in consumption as a result of economy recovery that cause s a rise in AD from AD 0 to AD 2. The resulting shortage and unplanned stock depletion incentivises producers to increase output and production in the next period. Real national income rises from Y 0 to Y 2 via the multiplier process , causing a rise in derived demand for workers during the period and demand-deficient unemployment fell as shown in Table 1. Furthermore, the shortage due to the rise in AD when economy is near full employment causes Malaysia to compete for factors of production which are increasingly scarce to carry on productio n. This increases cost of production and drives up prices which leads to an increase in demand-pull inflation from P0 to P2. 3m: Explanation of how a change in C affects AD, national output and demand deficient employment in both direction with clear adjustment process. 2m: Explanation of how a change in C affects demand-pull inflation in both direction with adjustment process. 1m: Clearly labelled diagram. (c) Extract 7 states that Malaysia had a lower -than-forecast growth performance in 2018. Explain how supply-side policies could have been used to bring about a greater rate of growth in living standards in Malaysia after the relative slow- down of 2018. [7] The relative slow -down of 2018 in Malaysia is primarily caused by a decrease in net exports where there was a ‘negative contribution from net exports.’ However, t he slowing down of the economic growth from the decrease in net exports is mitigated by a rise in private consumption, investment and government spending (Ext 7) causing overall economic growth rate to fall from 5.9% to 4.7% in 2018. The Malaysia government may thus implement supply -side policies such as removal of existing tariffs on selected imports (trade liberalisation) (e.g. for key FOP) to reduce prices of imported factors of production. Cost of production falls for firms. Profitability and hence SRAS rises which causes real national income to increase. Part of the increase in real NY is due to net export rising when export competitiveness increases due to lower cost of producing exports. The purchasing power and ability to consume more goods and services rise, leading to an increase in current material

standard of living, assuming the population growth does not outstrip real GDP growth. In the long run, to increase productivity and factor quality, Malaysia can further educate its workforce with deep skills. Increase in productivity via investing heavily in human capital upgrades workers’ skills which reduces cost of production due to the lower unit cost of labour input. with a rise in productivity due to education, it will increase productivity capacity. There will be a rightward shift of LRAS, that represent s an increase in potential output of the economy. This increase in productivity capacity will ensur e that the rise in AD can be accommodated without inflationary pressures. As there is a sustained increase in real national income , the quantity of goods and services available for consumption per person has increased, therefore allowing for a greater satisfaction of the needs and wants of the people, increasing future material standard of living for the average citizen if population growth does not outstrip real GDP growth. At the same time, the implementation of supply-side policies via education increases the literacy rate of the population, hence increasing non - material standard of living. In addition, improving productivity through skills training may allow workers to work shorter hours and have more leisure time to spend with family, thus raising their non-material SOL. Alternative: Another supply-side policy could be for the Malaysian government to give subsidies to encourage greater adoption of technology. With more utilisation of technology such as digitalisation and mechanisation in the production process, the country’s productivity increases, lowering cost of production and SRAS rises, leading to a rise in short term actual economic growth and material SOL. At the same time, adoption of technology raises the productive capacity of the country, leading to a rise in full employment level of output and potential growth, bringing about a rise in material SOL in the future. (d) Extract 6 suggests that a possible concern arising out of Malaysia’s good economic prospects was that the ringgit ‘would likely strengthen’. Discuss how a strengthening of the ringgit might result in ‘undesirable short-term consequences’, with particular reference to the standard of living in Malaysia. [8] Strengthening of ringgit will result in an appreciation of the exchange rate. There will be an increase in the price of exports in foreign currency and a decrease in the price of imports in domestic currency. Assuming that the Marshall-Lerner condition holds, sum of PEDx and PEDm >1, there will be a decrease in net exports which explains the ‘undesirable short -term consequences on some sectors of the economy’ such a s those that focuses on exports. With a decrease in net exports, there will be a decrease in AD. The decrease in output leads to a decrease in income and sets off the reverse multiplier process whereby one man’s spending creates another man’s income.