ECO211

ECONOMICS

INTRODUCTION MICROECONOMICS MACROECONOMICS
TO
- Concentrating on the choices made by -looks at the economy from a
MACROECONOMICS individual participants in the economy broader perspective by considering
-Stress on the role of prices in business & it overall performance and the way
the various sectors of the economy
personal decisions
- Sometimes microeconomics is called price relate at one other
-The study of aggregate economic
theory
activity

NORFARIZA MOHD ALI 11-Oct-21 1 NORFARIZA MOHD ALI 11-Oct-21 2

MACROECONOMICS a. To achieve full employment
OBJECTIVES
 full employment-all available resources are
CONVENTIONAL ISLAMIC employed to produce goods & services
PERSPECTIVES PERSPECTIVES
 unemploymentpovertypeople dissatified
 Objectives of conventional perspectives with the governmentpolitical upheaval
a. To achieve full employment crime  standard of living worsens
b. To achieve price stability
c. To achieve economic growth 3 NORFARIZA MOHD ALI 11-Oct-21 4
d. Equitable income distribution
e. Favourable balance of payments

NORFARIZA MOHD ALI 11-Oct-21

b. To achieve price stability c. To achieve economic growth

 To control inflation rate  A higher economy growth rate can be achieved
 Inflation = continues increases in average prices when more output is produced
 It is a process in which money steadily loses value &
 There will be more goods & services for the people
able to buy fewer and fewer goods & services to consume
standard of living
 To achieve economic growth, government should
encourage investment and increase government
spending.

NORFARIZA MOHD ALI 11-Oct-21 5 NORFARIZA MOHD ALI 11-Oct-21 6

d.Equitable income distribution e.Favourable balance of payments

 Narrow the gap between higher income and  A country will try to get an overall surplus
lower income groups. balance of payment

 What are the solutions? (money coming into country > money coming
 *Tax policy : progressive tax out from country)
 *Expenditure policy : Include subsidies,  If get deficit balance of payment =

educational scheme (money coming into country  money coming
out from country)
 country have to borrow $ from abroad or attract
deposits from abroad. This results in paying
interest rates and  country’s debt.

NORFARIZA MOHD ALI 11-Oct-21 7 NORFARIZA MOHD ALI 11-Oct-21 8

fariza 18-Oct-21 fariza 18-Oct-21

MACROECONOMICS DEFINITION OF NATIONAL INCOME

NATIONAL INCOME Total market value of all final goods and services
produced by a country during one year.

or
Total payments received by the factor of
productions through the production of goods &
services in a country in a year

Intermediate fariza 18-Oct-21 fariza 18-Oct-21
Goods
Final Goods CONCEPTS OF NATIONAL INCOME
• Goods used
to produced • Goods used Gross Domestic Product (GDP) : Market value of
final goods for final all final goods & svc produced in a country in a
consumptio given year, no matter by whom they are produced
• e.g. steel, n Gross National Product (GNP) : Market value of
glasses, all final goods & svc produced by citizens of a
tyres • e.g: car country, no matter where they are.

fariza 18-Oct-21 fariza 18-Oct-21

EXAMPLE : MALAYSIA FORMULA

GDP • Total market value of final goods GDP : GNP - Income Received Abroad + Income
GNP produced by Malaysians and foreigners Paid Abroad
in Malaysia
GNP : GDP + *(Income Received Abroad –
• Exclude final goods produced by Income Paid Abroad)
Malaysians working abroad
*Net factor income abroad @ IRA - IPA
• Total market value of final goods
produced by Malaysians working in
Malaysia and Malaysians working
abroad

• Exclude final goods produced by
foreigners working in Malaysia

fariza 18-Oct-21 fariza 18-Oct-21

DEFINITION MARKET PRICE & FACTOR COST

INDIRECT TAXES : levied on goods. Also MARKET PRICE : Current P in the market
known as taxes on expenditure or tax on through the forces of DD & SS.
consumption.
Market Price : Factor Cost –Subsidies +
Indirect Tax

also can be applied at

GDP Market Price : GNP Market Price :
GDP Factor Cost –Subsidies + Indirect Tax GNP Factor Cost –Subsidies + Indirect Tax

SUBSIDY : an incentive from the government to FACTOR COST : Real prices earned by
encourage producers to produce more.
producersFactor Cost = Market Price + Subsidies – Indirect

Tax

= GDP GDP Factor Cost – aInldsioreccat n be applied at GNP Factor Cost
Market Price + Subsidies Price + Subsidies
= GNP Market – Indirect Tax
Tax

fariza 18-Oct-21 fariza 18-Oct-21

TUTORIAL TUTORIAL

Find : ITEMS RM Find : ITEMS RM
1. GNPmp Mill 1. GDPmp Mill
2. GNPfc GDPmp 65 100 2. GNPmp GDP factor cost 3 470
3. GDPfc Factor income received from abroad 4 000 3. GNPfc Subsidies 50
Factor income paid abroad 3 000 Indirect Taxes 30
Indirect Taxes 500 Factor income paid abroad 80
Subsidies 250 Factor income received abroad 90

fariza 18-Oct-21 fariza 18-Oct-21

HOW TO MEASURE NATIONAL INCOME EXPENDITURE APPROACH

Adding all the expenditure made by 4 economic agents

EXPENDITU 1. Consumption (C) = The purchase of goods & svc produced by
RE firms, individuals or households

APPROACH 2. Investments (I) = The purchase of capital goods by firms for use
in production & in changes in the firm’s

inventories/stock

PRODUC 3. Government Spending (G) = The spending incurred by federal,
T@
INCOME state & local governments for final goods
APPROA OUTPUT
APPROA & Svc
CH
CH 4.Net Exports (X-M) = The difference between the value of exports
& the value of imports.

fariza 18-Oct-21 GDPmp = C + I + G + fariza 18-Oct-21

EXPENDITURE APPROACH (X-M)

Expenditure made by 4 economic agents : GNPmp = GDPmp + IRA – IPA

1. Household CONSUMPTION

+ GNPfc = GNPmp + Subsidies – Indirect Tax

2. Firm INVESTMENT

+ Net National Product fc (NNPfc) @ National Income
=GNPfc –*Depreciation
3. Government GOVERNMENT SPENDING

+

4. Foreign sector NET EXPORT * Depreciation =capital consumption

GDPmp

fariza 18-Oct-21 fariza 18-Oct-21

Personal Income (PI) = Income that is actually National Income Accounts RM million
received by households in a year & personal Consumption expenditure 10500
income tax has not been deducted Investment spending 8700
Government expenditure 11200
PI = National Income + Transfer payments – Corporate/Business Income Export 8500
Taxes – Retained Earnings- Undistributed Profit– Employment Provident Import 9100
Fund (EPF) - Social Security Contributions (SOCSO)–Insurance Premium Subsidies 3100
Taxes on expenditure 2400
Disposable Personal Income (DPI) = Income that Property income from abroad 6450
is left remaining after the payment of personal Property income to abroad 7850
income tax. Undistributed profits 900
Corporate income tax 1520
DPI = Personal Income – Personal Income Tax Social security contributions 2400
Transfer payment 580
Insurance premium 200
Capital consumption 1810
Personal income tax 2450

Using the information above, calculate:
a) Gross Domestic Product at market price.
b) Gross National Product at factor cost
c) Net National Product at factor cost.
d) Disposable Income.

fariza 18-Oct-21 GDPmp= 1st sector + 2nd fariza + 3rd

PRODUCT @ OUTPUT APPROACH sector

NI is measured by net value of all final goods & svc sector
produced by a nation during a year.
GNPmp = GDPmp + IRA – IPA

1st • Mining & GNPfc = GNPmp + Subsidies – Indirect Tax
sector quarrying,
Agriculture,
Forestry & Fishery

National 2nd • Manufacturing Net National Product fc (NNPfc) @ National Income
Income sector • Construction =GNPfc –*Depreciation

3rd • Electricity, Gas & * Depreciation =capital consumption
sector water, wholesale &
retail trade

• Finance, Insurance,
Real Estate &
business svc

• Transport, Storage &
communication

• Government Services
& other services

Expenditure approach Product approach fariza

INCOME APPROACH

Measure NI by adding all the various types of
income paid to firms & households in the form of
wages for labour, rent for land, interest for capital
& profits to entrepreneurs.

fariza 18-Oct-21 fariza

REAL INCOME, PER CAPITA INCOME & USES OF NATIONAL INCOME DATA
GROWTH RATE
1. Standard of living indicators
PER CAPITA INCOME = Average income per head of population
Compare the standard of living of people in different countries at different
Per capita income = National income times.
Total population
2. Comparisons between countries
*REAL INCOME = Income measured in fixed price index or base
year price index By comparing nationaI income with other countries.

*Real income=real GDP @real GNP 3. Sectoral contributions

Real income = Base year price index X *Nominal income Identify the important sector that contribute towards economic growth.
Current year price index
4. Government planning & policies
*Nominal Income = Income measured in current price
To formulate its short term and long term economic planning
GROWTH RATE = The percentage change in the quantity of (Malaysia Plan).
goods & svc produced from one year to another year.

Growth rate = Real income current year – Real income previous year X
100

Real income previous year

fariza fariza

PROBLEMS IN MEASURING NATIONAL Uses of NI NATIONAL INCOME Problems
INCOME
1.To measure the standard of 10
1. Problem of expertise living Problems
- expertise in measuring NI
2. Lack of sophisticated machinery @ technology 2. Comparison over time 3 approaches
- e.g : advanced software or advanced computer 3. Comparisons between
3. Problem of inaccessibility
- cannot access remote areas to collect data countries
4. Problem of false income information 4. Comparisons between
- underestimate earnings to avoid paying high taxes
countries
5. National planning

GDPmp = C + I + G + X GDI= Wages + Salaries + GDPmp = Sect 1 + Sect
–M Rent + Profit + Interest + 2 + Sect 3
Dividend + Indirect Tax +

Depreciation

MONEY, BANKING & Attributes / Qualities of Money
THE FINANCIAL
SYSTEM 1. Acceptability – accepted as a medium of
exchange
NORFARIZA MOHD ALI
2. Durability – not easily perishable

3. Divisibility – make small purchases

4. Portability or accessibility – easy to carry
around

NORFARIZA MOHD ALI

Attributes / Qualities of Money FUNCTIONS OF MONEY

5. Relatively scarce (limited in supply) 1. Medium of Exchange
6. Uniformity or homogeneity – in terms of -to facilitate transactions

design & weight 2. Measurement of Value (Unit of Account)
7. Cognizability – easily recognized
-measuring unit for prices
NORFARIZA MOHD ALI
3. Store of value

-must hold its value over time

4. Standard of Deferred Payment

-buying now, paying later

NORFARIZA MOHD ALI

• CONCEPTS OF MONEY 3. Commodity Money - Physical value is as great as its
1. Legal Tender – Money stated is guaranteed by the face value.eg: gold & silver coins

government & can be used as medium
of exchange

2. Fiat Money - Currency (Coins and paper money)

4. Token Money - Metallic value is lower than the face
value.eg: coins produced by Central
Bank

NORFARIZA MOHD ALI NORFARIZA MOHD ALI

CENTRAL BANK

Banking & Financial System • Established on 26 January 1959
• Owned and controlled by the government
• Banking Institutions
• Non-Bank Institutions NORFARIZA MOHD ALI
• Non-Bank Financial intermediaries

NORFARIZA MOHD ALI

FUNCTIONS OF THE CENTRAL BANK FUNCTIONS OF A COMMERCIAL BANK

1) To issue currency & to safeguard the 1) Accepting deposits from customers
external value of the currency 2) Providing loans and advances
3) Providing financial services
2) Banker to the government
NORFARIZA MOHD ALI
3) Banker to other banks

4) Holder of the country’s stock of gold &
foreign currency reserves

NORFARIZA MOHD ALI 5) Promotes monetary stability of the
country

Non bank Financial Institutions- M3 Non bank Financial Institutions

1. Finance companies 3. Merchant Banks
- The services provided are similar with - Do not accept deposits from public
- Provide portfolio management, financial
commercial Banks EXCEPT they do not issue
cheques. management
- E.g : CIMB finance bhd, Public Bank Finance - E.g : Public Merchant Bank Berhad
bhd
2. Islamic Banks
- A banking system that is based on Syariah
principle
- E.g : Bank Islam

NORFARIZA MOHD ALI NORFARIZA MOHD ALI

Non bank Financial intermediaries THEORY OF MONEY SUPPLY

• Set up by G to promote key sectors that are M 1 (Narrow $) Coins + Paper $ + Current deposits @ Demand deposits @
important to socio-economic development : M2
BSN, Agro Bank, Bank Pembangunan M’sia checks in commercial bank 3
Bhd M 3 (Broad $)
M 1 + Fixed & saving deposits in commercial banks +
Near $ or Quasy $
Broad Near $ or Negotiable certificates (NCD)from commercial banks + Bank
Broad Quasy $
Negara certificates + Repurchase Agreement(Repo) 5

M 2 + Fixed & saving deposits in Non Bank Financial

institutions (include merchant banks, discount houses, Bank

Islam M’sia Bhd, BSN. Bank Rakyat, Agro Bank) 2

M2–M1 (quite liquid but not as liquid as M1)

M3–M1

NORFARIZA MOHD ALI NORFARIZA MOHD ALI

TUTORIAL 1 TUTORIAL 2

Items RM Million Items RM Million
Fiat money 7,000 Paper money 5,500
Saving and fixed deposits in commercial banks 14,000 Demand deposits in commercial banks 12,000
Bank Negara certificates and negotiable certificates in 8,000 Negotiable certificates 15,000
commercial banks Bank Negara certificates 4,000
Money supply M1 13,000 New negotiable certificates produced by Bank Simpanan 6,000
Fixed and private sectors savings in other financial institution 25,500 Nasional
Fixed and private sectors savings in other financial institution 12,500

Calculate: a) If fiat money is RM7,100, how much
a) Value of current deposits is the coins?
b) Value of money supply M2
c) Value of money supply M3 b) Calculate M1
d) Value of narrow quasi money c) Calculate M2
e) Value of broad quasi money d) Calculate M3

NORFARIZA MOHD ALI NORFARIZA MOHD ALI

TUTORIAL 3 MONEY DEMAND : 3 Motives of Holding Money

Items RM Million MOTIVES Transactionary Precautionary Speculative
Paper money 2,500
Coins 2,000 Motive Motive Motive
Bank Negara certificates 5,000
Current deposits in commercial banks 15,000 REASONS ✓ People hold money to buy ❖ reason to hold money ➢ People hold bond instead of
Fixed deposits in commercial banks 25,000
Fixed and savings deposits in other financial institution 19,000 things or for consumer for uncertainty money
Negotiable certificates from commercial banks 16,000
expenditures & business purposes ➢ Factor determinant the price
Find :
a) Total fiat money transactions of bonds is the interest rate
b) M1
c) M2 ➢ Interest rate↑ , price of bonds
d) M3
e) Quasy money ↓

NORFARIZA MOHD ALI ➢ People tend to hold bond

rather than to hold cash

RELATIONSHIP ✓ When Income↑, money ❖ When Income ↑, ➢ When interest rate ↑, money

for Transactionary money for for Speculative motive ↓

motive ↑ Precautionary

motive↑

= +ve relationship = +ve relationship = -ve relationship

DIAGRAMS

Money demand Money Interest rate
1500 demand
500 20%
800 10%
200

NORFARIZA MOHD ALI 1000 2000 Income Income money
1000 2000
1000 2000

NORFARIZA MOHD ALI

Cash ratio = 10%, Lend out = 90% NORFARIZA MOHD ALI

• En Amin deposit RM 1 000 in Public Bank. 1 000
1 000
CREDIT CREATION • Liability
900
• A process where a small deposit will lead to a Asset 900
greater increase in the Ms.
Cash reserves ( 10%) 100 Deposits 810
• Assumptions 900 810
- Cash ratio is fixed by Central Bank Loans (90%)
- Leakage does not exist (No cash drawings)
- Public must keeps money in Bank Total 1 000 Total

NORFARIZA MOHD ALI • Public Bank will loan RM900 to another person, En Ali
• En Ali deposit RM900 in Maybank Bank.

Asset Liability

Cash reserves (10%) 90 Deposits
810
Loans (90%)

Total 900 Total

• Maybank will loan RM810 to another person, Cik Yati

• Cik Yati deposit RM 810 in AmBank. Liability
• Asset

Cash reserves (10%) 81 Deposits
729
Loans (90%)

Total 810 Total

Formula of credit creation The following data shows the balance sheet of ABA Bank for
the year ended 2014. Sept 2015
Name Formula Examples E.g with multiplier

Cash ratio @ Cash reserve X 100 100 X100% 1 000 * 10 = 10 000 Assets Liabilities
 of cash reserve Initial deposit 1000 100 * 10 = 1000
= 10% 900 * 10 = 9 000 Cash 30,000 Deposits 150,000
Loans 120,000

 deposits @ Total Ms Initial deposit 1 000 150,000 150,000
Cash ratio 10%
= 10 000

 reserves Initial reserve 100 a) Define cash ratio and calculate its value (3m)
Cash ratio 10% (2 m)
= 1 000 b) Based on the cash ratio calculated above, calculate:

 credit creation @ Initial loan 900 i. Money multiplier (1m)
Loans Cash ratio 10%
= 9 000 ii. Total money supply (2m)
Money Multiplier 1
Cash ratio 1/10% = 10 iii. Total credit created (2m)

c) List any two (2) limitations of the credit creation

d)

1. How much total deposits *↑cash ratio→↓ Ms, ↓loans, ↑reserves
2. How much total reserves *↓cash ratio→ ↑Ms, ↑loans, ↓reserves
3. How much total loans
4. Find cash ratio NORFARIZA MOHD ALI

NORFARIZA MOHD ALI

• Assume Bank A receives a deposit of RM1 000 from a
customer and faces a reserve requirement of 10%. Oct 2008

a) Determine how much the bank would lend out. Show your
answer on Bank A’s balance sheet.

b) Assuming that the loan shown in Bank A’s balance sheet
is redeposited in Bank B. Show the changes in Bank B’s
balance sheet if it lends out the maximum possible

c) Using the simple money multiplier, calculate the total
change in the money supply resulting from the RM1 000
initial deposit

NORFARIZA MOHD ALI

CHAPTER 5: PUBLIC FINANCE

 Name for the revenue and expenditure activities of the
government

NORFARIZA MOHD ALI NORFARIZA MOHD ALI

PUBLIC FINANCE GOVERNMENT REVENUE

1.Government 2.Government GOVERNMENT TAXES DIRECT TAX
REVENUE
Revenue Expenditure NON TAXES The burden of the tax cannot
be shifted to someone else

INDIRECT TAX

The burden of the tax can be
shifted to another person

e.g: petroleum royalties, fines,
summons, sale of goods &
services, income from
investment, loans

NORFARIZA MOHD ALI NORFARIZA MOHD ALI

Types of Tax Structure Tax rate (%) = Amount of tax paid X 100
Tax rate (%) = Amount of tax paid X 100 Amount of taxable income
Amount of taxable income

Tax rate Progressive Tax  Import perfume RM200 Import Tax = RM50
 50/1000 X 100 = 5%
20% • The higher the income, the higher the tax rates  50/5000 X 100 = 1% % TAX
10% • e.g : income tax
5%
Y 1%
1,000 5,000
1000 5000
Tax rate Proportional Tax Regressive Tax INCOME

25% • The tax rates is constant and not related to income
10,000 40,000 Y • e.g : corporate tax

Tax rate Regressive Tax

5% • The higher the income, the lower the tax rates.
1% Y • e.g : indirect tax

1,000 5,000 NORFARIZA MOHD ALI

NORFARIZA MOHD ALI

PUBLIC FINANCE GOVERNMENT ECONOMIC
POLICIES
GOVERNMENT
EXPENDITURE GOVERNMENT
ECONOMIC
POLICIES

GOVERNMENT OPERATING GOVERNMENT DEVELOPING FISCAL POLICY MONETARY DIRECT CONTROL
EXPENDITURE EXPENDITURE POLICY POLICY

*Current Expenditure *Expenditure on sosio-economic
projects
NORFARIZA MOHD ALI
NORFARIZA MOHD ALI

Surplus FISCAL POLICY Surplus Budget
Budget
Deficit Budget

Expansionary Fiscal Policy OTHER NAME Contractionary Fiscal
Deflation/Recession OVERCOME Policy

Inflation

Deficit ↓Tax METHODS/TOOLS ↑Tax
Budget
Balance or or
Budget
↑Government Spending ↓Government Spending

FISCAL ↓Tax? HOW IT WORKS ↑Tax?
POLICY ↑Government Spending?
↓Government

Spending?

NORFARIZA MOHD ALI NORFARIZA MOHD ALI

FISCAL POLICY FISCAL POLICY

 Recession jobless  Inflation Average
Prices 

 Deficit Budget MAIN GOAL:  Surplus Budget MAIN GOAL:
AVERAGE PRICES ↓!
GET EMPLOYED!
1.  TAX e.g. income tax →income → C → Dgoods & services 
1.  TAX e.g. income tax →income → C → Dgoods & services  →P → overcome inflation
→production → hire labor → overcome unemployment
OR
OR
2.  GOVERNMENT SPENDING ??? (solve it)
2.  GOVERNMENT SPENDING e.g. income →income  →
C → Dgoods & services  →production → labor get
employed → overcome unemployment

NORFARIZA MOHD ALI NORFARIZA MOHD ALI

MONETARY POLICY

Expansionary Monetary OTHER NAME Contractionary Monetary  Ms($)
Policy Policy inflation, must  Ms

Cheap Monetary Policy Tight Monetary Policy  Ms ($)
deflation, must ↑Ms
Def lation/Recession OVERCOME Inf lation

↑ Money Supply (Ms) METHODS/TOOLS  Money Supply (Ms)

7 tools HOW IT WORKS 7 tools

NORFARIZA MOHD ALI NORFARIZA MOHD ALI

GOVERNMENT ECONOMIC POLICY DIRECT CONTROL POLICY

GOVERNMENT  Campaigns : ‘Beli barangan buatan Malaysia’
ECONOMIC
POLICY  Price tagging : price label on goods

FISCAL POLICY MONETARY DIRECT CONTROL  Rationing : purchase limited goods
POLICY POLICY
 Price control : ceiling price
NORFARIZA MOHD ALI
NORFARIZA MOHD ALI

ISLAMIC GOVERNMENT REVENUE ISLAMIC GOVERNMENT
EXPENDITURE

SPECIFIC REVENUE GENERAL REVENUE Expenditure Expenditure Expenditure,
* Zakat *Kharaj mandated for future assigned to
by syariah needs the state by
*Sulh al Jizyah its people
*Ushur
*Daraib
*etc

NORFARIZA MOHD ALI NORFARIZA MOHD ALI

9/01/2022 MACROECONOMIC PROBLEMS :

INFLATION  1. UNEMPLOYMENT PROBLEM
 2. INFLATION PROBLEM

1

Definition

 A continuous ↑ in the general price level of goods and
services in the economy

 Inflation is measured using :
Consumer Price Index (CPI)
CPI current year – CPI previous year X 100
CPI previous year

Types of Inflation Demand Pull Inflation

Demand Pull P  Happens when ADAS
Inflation AS at full employment level
Cost push
inflation  Caused by rises in AD

Types of P2  At Full Employment level,
Inflation economic resources fully

P1 FE AD2 employed
P0 →P↑→inflation occurs.

AD1

AD0 O/p

Q0 Qf

Cost Push Inflation Effects of Inflation

Gainers

P  Continuous increase in cost
AS1 of production
 AS curve will shift to the left Businessman Buyers
Shareholders Those received
AS0 because one of these factors: Labor Union fixed interest
from Investment
P1 E1 a) Wage push inflation-↑ in wage Those received
P0 E0 level → ↑ cost of production
fixed income
b) Import induced inflation- in

imported raw materials or
AD finished goods→ ↑ cost of

Q1 Q0 O/p production
c) Profit push inflation- ↑ in profit

by monopolist

Debtors Creditors

GAINERS LOSERS

 LABOR UNION – succeeds bargain for a  THOSE RECEIVED FIXED INCOME –
higher wage real value of income due to  in cost of
living
 BUSINESSMAN – sell at higher price but
at constant cost  THOSE RECEIVED FIXED INTEREST –
e.g government bonds
 SHAREHOLDERS – get ↑ dividends due
to ↑ higher profits  BUYERS – paying  price for goods
 CREDITORS – repaid at same amount
 DEBTORS – repay debt at same amount
but at a lower value but at a lower value

ANTI-INFLATIONARY MEASURES CONTRACTIONARY Fiscal Policy or

*Fiscal Policy SURPLUS BUDGET

*Monetary Policy 1. ↓GOVERNMENT SPENDING
*Direct Control Policy • ????

ANTI 2. ↑TAXES
INFLATIONARY • ↑T → ↓Yd → ↓C → ↓DD o/p →

MEASURES ↓ price → o/come inflation

CONTRACTIONARY Monetary Policy Monetary Policy- overcome inflation

Ms($) CENTRAL BANK 1. Increase Bank rate / Discount rate
inflation, must  Ms Cent.B ↑ bank rate → borrowing expensive → DD
loans ↓ → Ms ↓→ o/come inflation
1. Increasing the Bank rate / Discount rate
2. Increasing the Interest rate on saving 2. Increase Interest rate on saving
3. Open Market Operations - Selling T-bills Centr.B persuade comm.Banks ↑r on saving → attract
4. Increasing the Reserves Requirement people to save → Ms↓→ o/come inflation

9 January 2022 NORFARIZA MOHD ALI 13

Monetary Policy- overcome inflation

3. Open Market Operations - Selling T-bills
Central Bank SELLS Treasury bills → ??

4. Increasing legal reserve requirement / cash ratio
Central Bank  reserves requirement → ??

MACROECONOMIC Definition of
PROBLEMS : Unemployment

UNEMPLOYMENT ◼ A situation in the economy where there are
people between the age of 15 to 64 years
ECO 211 old who are not working but are actively
MACROECONOMICS seeking jobs

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Definition of Definition of
Labor Force Not in the Labor Force

◼ People from the total population between ◼ People from the total population between
the age of 15 and 64 years old who are not the age of 15 and 64 years old who are in
in institutions and who are either employed institutions or are voluntarily unemployed.
or unemployed but seeking jobs.
Examples

3/01/2022 Norfariza Mohd Ali 3 3/01/2022 Norfariza Mohd Ali 4

Types of Unemployment

Population

1.Cyclical 2. Seasonal 3. Frictional
unemployment unemployment unemployment

Labor force Not in the labor
force

Employed Unemployed Those who are Those who are in Discouraged 4. Structural 5. 6. Hidden
not in age education workers & who unemployment Technological unemployment
institutions are voluntarily to unemployment
between 15 and be unemployed
64 years old

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Types of Unemployment Types of Unemployment

1. Cyclical Unemployment 2. Seasonal Unemployment
Lack of jobs because of a downswing in a Workers have jobs for at least a part of the
business cycle or a recession. year but will be unemployed at other times
because of seasonal factors. E.g?

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Types of Unemployment Types of Unemployment

3. Frictional Unemployment 4. Structural Unemployment
Caused by workers voluntarily changing jobs Caused by employers do not demand their
and by temporary layoffs. E.g? skills or changes in economic structures.
E.g?

3/01/2022 Norfariza Mohd Ali 9 3/01/2022 Norfariza Mohd Ali 10

Types of Unemployment Types of Unemployment

5. Technological Unemployment 6. Hidden Unemployment
Caused by a change in technology or People who are actually employed, but are
techniques of production. E.g not productive

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Effects of Unemployment Measures to Overcome
Unemployment Problem
1. Effects on Individual 2. Effects on Economy
and society GOVERNMENT
➢ Less production ECONOMIC
➢ Financial Problem POLICY
➢ Loss of self respect ➢ Lower national
➢ Depression income
➢ Social problem
➢ Poverty

FISCAL POLICY MONETARY POLICY DIRECT CONTROL
POLICY

3/01/2022 Norfariza Mohd Ali 13 Norfariza Mohd Ali

FISCAL POLICY EXPANSIONARY Monetary Policy

Deficit Budget OTHER NAME Surplus Budget 1. Bank rate / Discount rate
Expansionary Fiscal Policy Central Bank ↓ bank rate → borrowing cheap → DD
Contractionary Fiscal loans ↑ → Ms ↑ → o/come unemployment
Policy
Deflation/Recession OVERCOME 2. Lowering the *reserves requirement / cash ratio
T or ↑G METHODS/TOOLS Inflation
@ Central Bank ↓ cash ratio → encourage commercial
T<G HOW IT WORKS ↑ T or G
@ banks offer more loans to public → Ms ↑ → o/come
T?
↑G? T>G unemployment Cash 40% 60% LOAN
ratio RM400 RM600
↑ T?
Deposit
G?

RM1000

Cash 10% 90% LOAN
ratio RM100 RM900

Norfariza Mohd Ali Norfariza Mohd Ali

EXPANSIONARY Monetary Policy Tools to Overcome
Unemployment
3. Interest rate on saving
Central Bank persuade commercial Banks ↓ interest rate on (Direct Control Policy)
saving → attract people to spend → Ms↑→ o/come
unemployment No. Tools/ Instruments Unemployment
1. Birth Control Slow down in the supply of labor
4. Open Market Operations 2. Development of new land Provide new area to developers
Central Bank BUYS Treasury bills → commercial banks 3. Creation of new job opportunities ??
SELL → Ms ↑ → o/come unemployment 4. Provision of professional skill and ??

technical education

Norfariza Mohd Ali Norfariza Mohd Ali

NORFARIZA MOHD ALI 1

THE PRINCIPLE OF ABSOLUTE ADVANTAGE

*The ability to produce more goods than another country.

1Table : Production Before International Trade. Table 2:Production After Specialization.

Million ton Country Million ton
Thailand Pineapple
Country Pineapple Grape Australia Grape
Thailand 40 80
Australia 40 Total
60
Total 120
100

Term of trade 3Table : Production After International Trade.

The rate at which goods are exchanged Country Million ton Grape
Example : 1 ton of pineapple for 1 ton of grape. Thailand Pineapple
Australia
1 Pineapple : 1 Grape
Total

NORFARIZA MOHD ALI 2

THE PRINCIPLE OF COMPARATIVE ADVANTAGE

*The ability to produce goods at a lower opportunity cost than another country

1Table : Production Before International Trade 2Table : Opportunity Cost

Country Cotton (tons) Rice (tons) Country Cotton (tons) Rice (tons)
Malaysia 60 15 Malaysia

China 20 10 China
Total 80 25

3Table : Production After Specialization. Term of trade

Country Cotton (tons) Rice (tons) 1 cotton =
Malaysia or

1 rice =

China
Total

4Table : Production After International Trade

Country Cotton (tons) Rice (tons)
Malaysia

China
Total