ECO211 EXTRA REVISION

INFLATION

DEFINITION

It is defined as a sustained increase in general price level. It can also refer to the condition
of “too much money chasing too few goods.” Inflation is an indication of the value of
money. A rise in general price means a drop in the value of money held by the society.

Inflation is measured using a price index. A weighted consumer price index (CPI) measures the
change in the average prices of a ’market basket’ of goods and services purchased by a typical
urban household, taking into account importance of certain goods relatively to others. An
increase in the CPI reflects inflation in the economy.

TYPES OF INFLATION

a) DEMAND-PULL INFLATION

This happens when there is an excess of aggregate demand for goods and
services over aggregate supply or the maximum available outputs in the economy. A
high aggregate demand may be the result of an increase in government spending,
a drop in taxes or a shock (sudden increase) in investment due to a drop in
interest rate. The problem arises when there is an excessive money supply and the
economy is moving towards or is already at full employment.

The following diagram shows demand-pull inflation. Increase in the price level from P1 to
P2 shows the result of an increase in aggregate demand towards full employment
income. Output price rises because demand is causing high input price.

Further increase in price to P2 shows an increase in aggregate demand above full
employment. Here, real output has reached maximum limit. Further increase in output
shown is only an increase in nominal output, which reflects an increase in prices.

General Price

Real Output

Demand-Pull Inflation

1

b) COST-PUSH INFLATION

Cost-push inflation shifts the aggregate supply curve (AS) to the left. The supply shift
causes the equilibrium price to rise and the aggregate output to decline.

The shift in the AS curve may result from any of the following:
• Wage Push Inflation
Occurs due to an increase in wage level. A rise in the wage level will increase
production and output price. Wage may be forced to rise due to:
o Excess of labor demand over labor supply at full employment output.
o A bargain by labour union.
o Producer is forced to increase wage to avoid migration of workers to
other firms.

• Profit-Push Inflation
This occurs when a monopolist increases its profit by restricting outputs or
increasing its profit above cost. The result is an increase in price of outputs.

• Import-Induce or Imported Inflation
This occurs when imported raw materials or finished goods are having price
increase in the exporting nation. This leads to an increase in the production cost
of imported nation and eventually an increase in the price of outputs.

General Price

Real Output

Cost-Push Inflation

2

EFFECTS OF INFLATION

1. Lost of confidence
Inflation results in the society’s lost of confidence in the value of money because of the
fall in its value, especially in the international market.

2. Wider gap in real income distribution between different groups of people
Real income measures how many goods can be purchased with given money income.
The following are those who benefit from inflation:
• A strong labour union who succeeds in its bargain for a higher wage rate.
• Investors, business people and farmers who sell at higher price but at constant
cost.
• Shareholders who benefit from higher dividends due to higher profits.
• Debtors, because they repay the debt borrowed at same amount but at lowest
value.
At the same time, these people lose from inflation:
• Pensioners and those receiving fixed salaries.
• Those receiving fixed interest from investment, such as government bonds.
• Buyers due to paying high price for goods.
• Creditors, because they are repaid the same amount as borrowed by debtors but
the value of money has dropped.

3. Transfer of financial capital to non-productive sectors
In order to obtain high profit fast, capital owners channel their money to sectors that do
not contribute to outputs or employment, for example in the real estate sector or in
speculation activities.

4. Inefficiency in output and decrease in the quality of outputs
This happens when there is demand-pull inflation because high demand for goods
decreases the risk of business.

5. Increase in investment and output
Higher profits due to higher price encourage firms to invest and produce more.

6. Deficit in the balance of trade
Balance of payment’ position will worsen because local goods are expensive in the
foreign market while foreign goods are cheaper. A simultaneous decline in exports and
increase in imports results in a deficit in the balance of payments.

3

MEASURES TO CONTROL INFLATION

a) MONETARY POLICY
Government may use monetary instruments / tools to restrict money supply and credit
creation in the economy in the effort to combat inflation. The policy involves
contractionary monetary policy, aiming at reducing money supply.
Quantitative measures:
• Open Market Operations – selling short-term bonds
The central bank may sells the short-term bonds or short-term government securities
and treasury bills in the open market to influence the size of bank deposits. Money
supply in the economy can be reduced by selling more T-bills during inflation.
• Variation of Legal Reserve Requirements – increase reserve requirement
The central bank may increase cash, liquidity or reserve ratio requirements to
influence credit creation and money supply. Higher ratios will mean lesser amount to
be loaned out to public. Inflation can be controlled when amount of demand for
money and purchasing activities has been reduced.
• Funding – selling long-term bonds
This refers to the conversion of short-term loans. Short-term assets like treasury-bills
are reduced and more long-term loans and advances are given. This will lengthen
the payment of the principal sum so that the bank cannot create multiple credits.
The inflation rate can be reduced when the public reduced their demand for money
and purchasing activities.
• Discount Rate or Bank Rate – Increase discount rate or bank rate
This refers to the rediscount rate of exchange and treasury bills. A contractionary
money policy will force the central bank to increase its bank rate. Higher rate will
discourage borrowings and spending.
• Interest Rate Policy – Increase interest rate
The central bank will persuade commercial bank to increase their rate of interest on
deposits. This will attract more deposits and increase the level of savings. Total
demand will also fall.

Qualitative measures:
• Selective Credit Control

This is done by allowing loans for productive purposes only, by increasing minimum
margin requirement to open a letter of credit, or by imposing tighter hire purchase
regulations by fixing minimum down payment and maximum repayment period.
• Moral Suasion
Here the central bank will persuade commercial banks to restrict their lending policy.
• Special Directives
The central bank may set up directives and instructions to banks to reduce the
volume of loans given to clients.

4

b) FISCAL POLICY
Fiscal or budget policy refers to the manipulation of tax and / or government spending to
influence the economy. The main aim is to control excessive demand that causes general
price to increase .
• Increase in taxes
An increase in taxes will reduce disposable income of individuals. A reduction in
consumption will follow and this in turn will reduce aggregate demand in the nation.
Eventually price will fall to a slow demand of goods.
• Decrease in government spending
A reduction in government spending will directly affect aggregate demand.
Government may cut salaries of civil servants and postpone projects that can be
delayed. By cutting down on expenses, aggregate demand will fall and this will
reduce price level.

c) DIRECT CONTROL POLICY
This refers to direct government intervention to correct economic problems of a country.
• Pricing Policy
The government may control price hike by imposing maximum or ceiling price on
goods. This price is lower than market price. However this may lead to the existence
of black marked due to high demand on goods. Government will also require that all
goods sold be labeled to prevent producers from over-charging the consumers.
• Wage Policy
Government may restrict increase in wages. Any demand for an increase in wages by
labour union must be accompanied by an improvement in productivity.
• Increase Output
The government may reallocated resources from the production of excess goods
to the production of necessities and limited goods.
• Import-Export Policy
Through protectionism tools such as quota and import taxes, government should
increase import of necessary goods and decrease import of luxury and less important
goods for export. It’s the other way round.
• Rationing
Purchase of goods can be controlled using coupons.
• Anti-Hoarding Campaign
Here, reports will be made against producers and consumers who store their goods
unnecessarily, because such storage could cause artificial shortage and push price
up.

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COMMERCIAL BANKING

DEFINITION

A commercial bank is a firm (a profit-making institution) with a charter from the government to
engage in the business of banking.

FUNCTIONS OF COMMECIAL BANK

1. Accepting Deposits from Customers

This function is important, because banks mainly depend on the funds deposited with
them by the public. There are basically three kinds of deposits: current or demand
deposits where cheques are drawn, savings deposits which provides easy saving and
withdrawing facilities and fixed or time deposits which provides certain amount of
interest at maturity.

2. Providing Loans and Advances

Commercial banks make profits by advancing loans to the public. There are three ways in
which banks can give loans: direct loans, overdraft / advance account and discounting of
bills.

Direct loans are where the clients would meet the loan officer and then negotiate on
matters pertaining to maturity period, interest rate and collateral security.

For overdraft, a current account holder can withdraw in excess of his account balance,
for which he has to pay the bank interest.

Discounting of bills is when the bank advances payment to a client who has allowed his
debtor a period of credit, collecting the debt from the debtor when it is due for
repayment.

3. Providing Financial Services

This includes tax management, purchase of shares, night-safe facilities, and automatic
teller machine, keeping of valuables and documents and consultation on financial
matters.

CREDIT CREATION

This is a process where a small given deposit will lead to a greater increase in the money supply
of the economy.

Assumptions:

• Cash ratio is fixed by BNM and its value is constant.
• Leakage (e.g.: cash drawings from the bank) does not exist.
• Public keeps money in the bank.
• Bank does not keep excess reserves.
• There are only two types of assets: cash and loans.
• Bank has only one liability: deposits.
• Deposits are in the form of current deposits.
• Assume multiple banks (multi-banking system in the economy).

1

Ways of creating credit:

• Giving loans through direct loans, overdraft or discounting of bills.
• Investing (buying of shares and government securities) and purchasing of T-bills.

The process of credit creation:
Assume that bank’s legal cash requirement is 20% and the initial deposit is RM1000.

BANKS DEPOSITS RESERVES 20% LOANS @ EXCESS RESERVE
A RM1000 RM200 RM800
B 160 640
C 800 128 512
D 640 102.4 409.6
. 512 . .
. . . .
. RM1000 RM4000
TOTAL RM5000

TOTAL MONEY SUPPLY (TOTAL DEPOSITS) = 1 / Cash Ratio x Initial Deposits
1 / 0.20 x 1000
= RM5000
1 / Cash Ratio x Initial Reserve
= 1 / 0.20 x 200
RM1000
TOTAL RESERVE = 1 / Cash Ratio x Initial Loans
1 / 0.20 x 800
= RM4000

=

TOTAL LOANS (TOTAL CREDIT CREATED) =

=

=

___________________________________________________________________

COMMERCIAL BANK’S T-ACCOUNT

BANK A BANK B
Balance Sheet Balance Sheet

ASSETS 200 LIABILITY 1000 ASSETS 640 LIABILITY 800
Reserves 800 Deposits 1000 Loans 160 Deposits ___
Loans 1000 Reserve 800 800

----------------------------------------------------------------------------------------------------

Note: The smaller the reserve ratio, the higher or better for banks to increase credit.

2

Limits to credit creation:

• A change in cash ratio / legal reserve requirement (if ratio is increased, the credit creation is
reduced).

• Clearing house (cheque-sorting house / center). This slows down the process because it
involves a lot of physical movements among banks. Also, reserves used to settle cheque in
the clearinghouse need to be replaced.

• Replacing them means less loans to be given out.

• Availability to collateral security (mortgages, land titles, etc). Without it, lending cannot take
place.

• BNM”s monetary control (e.g. control on bank rates) will affect amount of loans.

• Leakages in the banking system (e.g. when idle money is held for precautionary motive).

• When banks keep excess reserve, less credit can be created.

Example:

Given the balance sheet of Bank ABC

Balance Sheet (RM Million)

-------------------------------------------------------

ASSETS 200 LIABILITY
Reserves Deposits 1000

Loans 850

--------------------------------------------------------

Total 1000 1000

a) Calculate the percentage of cash ratio.
Cash Ratio = (Cash / Current Deposit) x 100%
= (200 / 1000) x 100% = 20%

b) Calculate the money multiplier.
Money Multiplier = 1 / Cash Ratio
= 1 / 0.2 = 5

c) Calculate the amount of credit created.

Money Supply = 5 x 1000 = 5000

Amount of Credit Created = 5000 – 1000

= 4000

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CENTRAL BANK

The Central Bank of Malaysia was established on January 1959, under the Central Bank of Malaya
Ordinance and the Banking Ordinance 1958. It is owned and controlled by government. The
central bank is given the responsibility to manage the country’s financial activities and financial
bodies in order to maintain economic stability and prosperity in the country.

FUNCTIONS

1. To issue currency and to safeguard the external value of the currency.
The central bank has been issuing currency since 1967. It also helps to safeguard the
value of the currency. Malaysian Ringgit is being backed by gold and foreign currency
reserves to safeguard its value. One Malaysian Ringgit is expressed as 0.290299 g of fine
gold.

2. Banker to government
The central bank keeps the government’s principle bank accounts, receives tax and other
revenue and makes payments with respect to government expenditure. It also manages
the national debt on behalf of the government, sells new issues and redeems maturity
treasury bills. As banker to the government, the central bank is a source of financing for
the federal government. The central bank provides temporary advances to the federal
government to meet shortfalls in the budget revenue to 12.5% of the estimated receipts
of the federal government. However, the government needs to pay back no later than
three months from the end of the financial year in which the loan was made.

3. Banker to other banks
Banks will deposit any spare cash they posses into their balances at the central bank.
These working balance allow the banks to settle indebtedness between them by shifting
the ownership of a balance or deposits from one bank to another. The central bank also
provides lend-of-last-resort facility to commercial banks, merchant banks, finance
companies and discount houses. The presence of a lender of last resort provides
confidence in the financial institution structure.

4. Holder of the country’s stock of gold and foreign currency reserves
The central bank manages the nation’s foreign exchange reserves, implements the
government’s exchange rate and balance of payment’s policy and any exchange control
regulations, which are in force.

5. Promotes monetary stability of the country
The central bank is responsible in achieving monetary stability, control of credit and
hence money supply as an essential condition for continued growth. The central bank
has been endowed with monetary instruments to perform this function.

4

MONETARY POLICY
Definition:

Monetary Policy is government policy on money supply and credit creation aimed at achieving
higher economic growth, stability in prices, and full employment.

Types of Monetary Policy:
1. Contractionary or Restrictive or Tight Monetary Policy

Tool used will reduce money supply in the economy. This is aimed at reducing the
pressures of inflation in an economy.
2. Expansionary or Cheap Monetary Policy
Tool used will increase money supply and activities in an economy. This will help increase
employment and growth.

Instruments

1. Quantitative Instruments:
• Discount Rate
This refers to the rediscount rate of exchange and treasury bills. A contractionary
money policy will force BNM to increase its bank rate . Higher rate will discourage
borrowings and spending.
• Open Market Operations
BNM buys or sells securities and treasury bills in the open market to influence the
size of bank deposits. Money supply in the economy can be reduced by selling more
T-bills during inflation.
• Legal Reserve Requirements
BNM may increase cash, liquidity or reserve ratio requirements to influence credit
creation and money supply. Higher ratios will mean lesser amount to be loaned out
to public.
• Funding
This refers to the conversion of short-term loans. Short-term assets like treasury-bills
are reduced and more long-term loans and advances are given. This will lengthen
the payment of the principal sum so that the bank cannot create multiple credits.

2. Qualitative Instruments:
• Selective Credit Control
This is done by allowing loans for productive purposes only, by increasing minimum
margin requirement to open a letter of credit, or by imposing tighter hire purchase
regulations by fixing minimum down payment and maximum repayment period.
• Moral Suasion
Commercial banks are sometimes required by BNM to reduce the volume given to
public.
• Interest Rate
Banks will be persuaded to increase their interest rate on deposits to attract more
savings from the public.

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NATIONAL INCOME ACCOUNTING

TUTORIAL QUESTIONS and ANSWERS

Let’s try out one exercise here. (page 14/ Study Guide for Macroeconomics)
Income Appoach

Exercise 1:

Given in the following table is the national income data for country ABC for the
year 2000. Based on the data given calculate:

i) Gross Domestic Income (GDP)
ii) Net Domestic Income
iii) Gross National Income (GNP)
iv) National Income.

ITEMS RM (millions)
rent 2 050
wages and salaries 900
interest 1120
distributed profit (unretained profit) 3 200
undistributed profit (retained profit) 2 150
proprietors’ income 810
depreciation of capital 800
net factor income from abroad (NFIFA) 710

Table: Data for country ABC

ANSWER TO EXERCISE 1:

Exercise 1:
i) Gross domestic income (GDI)

= rent + wages and salaries + interest + distributed profit
+ undistributed profit+ proprietors income

= 2 050 + 900 + 1 120 + 3 200 + 2150 + 810
= 10 230 million.
ii) Net Domestic Income
= 10 230 – 800
= 9,430 million.
iii) Gross national income (GNI)
= GDI + NFIFA
= 10 230 + 710
= 10 940 million.

1

iv) National Income OR NI = NDI + NFIFA
= GNI – depreciation = 9,430 + 710
= 10 940 – 800 = 10,140

= 10 140 million.

Page 17/ Study Guide for Macroeconomics
Product Appoach

Exercise 2:
Consider the following table for national income account of a country PQR. Calculate for:

i) Gross Domestic Product at market prices (GDPmp) using the product approach.
ii) Gross National Product at factor cost (GNPfc)
iii) National Income (NI)

ITEMS RM (million)

Government services 10,200
Mining and Quarrying 21,000
Finance, insurance and other services 19,600
Manufacturing 48,000
Wholesale and retail trade 20,200
Agriculture, forestry and fishing 18,000
Transport, storage and communication 29,400
Construction 97,000
Electricity, gas and water 27,000
Consumption tax 25,000
Net factor income from abroad 48,500
Depreciation 30,000
Subsidies
880

Table: Data for country PQR

ANSWERS TO EXERCISE 2:

Exercise 2:
i) GDPmp = G. Services + mining + finance + manufacturing + wholesales

+ agriculture + transport +
construction + electricity.

= 10,200 + 21,000 + 19,600 + 48,000 + 20,200 + 18,000 +
29,400 + 97,000 + 27 000

2

= 290, 400 million.
ii) GNPfc = GDPmp + NFIFA – consumption tax + subsidies

= 290,400 + 48,500 – 25000 + 880 = 314,780 million
iii) NI = GNPfc – depreciation = 314,780 – 30,000 = 284,780 million.

Page 20 / Study Guide for Macroeconomics
Expenditure Appoach

Exercise 3:

The following table shows the value of economic items in a country for year 2016:

ITEMS RM(MILLION)

Government expenditure 40500
Private consumption 12500
Public investment 20100
Gross Investment 52000
Change in stock 1000
Goods and services exported 15000
Goods and services imported 18550
Net factor payments abroad 35000
Expenditure taxes 10000
Subsidies 13500
Depreciation allowances 5000
Income taxes 800
Transfer Payment 120
Employees Provident Fund (EPF) 200
Business Profit Taxes 300

Based on the above table, calculate:

a) GDP at market price
b) GNP at factor cost
c) GNP at market price
d) National Income
e) Personal Income
f) Disposable Personal Income

3

ANSWERS TO EXERCISE:

Exercise 3: From the table, to calculate:

a) GDP at market price = G + C + G + I + stock + X – M
= 40500 + 12500 + 20100 + 52000 + 1000 + 15000 – 18550
= 122550

b) GNP at factor cost = GDPmp – gst + subsidies +NFPA
= 122550 -10000 + 13500 + 35000
= 161050m

c) GNP at market price = GDPmp + NFPA
= 122550 + 35000 = 157550m

or: GNP at market price = GNPfc +gst – subsidies
= 161050 + 10000 – 13500 = 157550m.

d) National Income = GNPfc – capital depreciation
= 161050 – 5000 = 156050m.

e) Personal Income = NI + Transfer Payment – EPF – BPT
= 156050 + 120 – 200 – 300
= 155670

f) Disposable Personal Income = PI – Income Taxes
= 155670 – 800 = 154870m.

Page 24 / Study Guide for Macroeconomics
Economic Growth

Exercise 4:
Given the nominal GDP and price index for the year 2015, 2016 and 2017.

Year Nominal GDP Price Real GDP Growth
(RM billion) Index Rate
2015
2016 28,000 120
2017 32,000 125
36,000 122

a) Find the real GDP for each year.
b) Using the real values, calculate the growth rate for the year 2016 and

2017.

4

ANSWERS TO EXERCISE 4:

Exercise 4:
answers for a) and b):

Year Nominal GDP Price a) Real b) Growth
(RM billion) Index
G Rate
120
125 DP
122
2010 28,000 23333.33 -
2011 32,000
2012 36,000 25600.00 9.7%

29508.20 15.3%

______________________________________________________________________

Structured Questions

Page 28/ Study Guide for macroeconomics

Structured Questions

1. Refer to the following national income data for country XYZ for the year 2014.

ITEMS RM (millions)
wages and salaries 1 060
Rent 870
Interest 880
distributed profit 1 200
proprietor’s income 780
Depreciation 210
undistributed profit 150
transfer payment 90
social security contribution 80
personal income tax 130
net factor income from abroad 70

Based on the above data, calculate:
i) Gross Domestic Income
ii) Gross National Income
iii) National Income
iv) Personal Income
v) Disposable Personal Income

5

2. The table below contains items from the national income account of a country.

ITEMS RM (million)
Consumption 11,800
Government services 9,200
Mining and Quarrying 8,000
Finance, insurance and other services 9,600
Manufacturing 28,000
Rent 23,000
Subsidies 790
Wholesale and retail trade 11,200
Agriculture, forestry and fishing 15,600
Transport, storage and communication 6,400
Construction 3,800
Profit 4,800
Electricity, gas and water 1,900
Tax on expenditure 15,000
Net Factor income from abroad 8,250
Depreciation of capital 23,000

Calculate:

i) GDP at market prices using the product (output) approach.
ii) GNP at factor cost
iii) National Income

3. Fill in the blanks with appropriate answers.

ITEMS RM (millions)
Consumption expenditure 11,200
Investment spending 8,790
Government expenditures 10,150
Export 7,800
Import 8,250

Gross Domestic Product at market price …..(i)……
……(ii)…… 2,780
3,150
Subsidy
Gross Domestic Product at factor cost …..(iii)……
5,420
Income received from abroad
Income paid abroad 6,150
(iv)
Gross National Product at factor cost 1,180
…….(v)…… ……(vi)…….
800
National Income 1,200
Undistributed profit 2,350
Corporate income tax 900
Social security contribution ……(vii)…….
Transfer payment

Personal Income

6

4. The following data refers to the national income of a particular country.

Items RM(million)
Private expenditure 100
Export 160
Import 154
Taxes on expenditure 88
Business taxes 40
Personal taxes 26
Consumer expenditure 365
Government purchased of goods and services 132
Property gain from abroad 12
Property paid abroad 5
Capital Consumption or Depreciation 72
Transfer payment 50
Social contribution 20

Calculate:
i. GDP at market price
ii. GDP at factor cost
iii. GNP at factor cost

iv. National Income
v. Disposable Personal Income

7

5. The table below shows the national income data for an economy for 2008 with a
population of 10 million.

Items RM million

Private consumption 255,660
Public Investment 28,565
Corporate investment 56,240
Net property income from abroad -15,895
Government expenditure 27,770
Increase in inventory -4,510
Capital Consumption or Depreciation 22,265
Gross profit from public enterprise -15,555
Wages 59,905
Taxes on expenditure 32,676

Calculate:

(a) Gross Domestic Product at market prices
(b) Gross Domestic Product at factor cost
(c) Net Domestic Product at market price
(d) Net National Product at market prices
(e) Gross National Product at factor cost
(f) Net National Income
(g) National Income per Capita
(h) Explain why the values of the following items as in the above table are negative:

i) Net property income from abroad
ii) Increase in inventory.
(i) Name the method used in the calculation above.
(j) Give another two (2) methods of computing the national income data

8

6.a) Refer to the same information below to answer the following questions.
(But each question is independent to one another)

Indirect taxes RM750 mil.
Subsidy RM610 mil.
Depreciation RM205 mil.
Net factor income from abroad RM – 80 mil.
Personal income tax RM120 mil.

i) If GDP at factor cost is RM27,860 millions, find GDP at market price.
ii) If GDP at factor cost is RM35,600 millions, find GNP at factor cost.
iii) If national income is RM47,300 millions, find GNP at factor cost.
iv) If GDP at market price is RM38,300, find GNP at factor cost.

b) List two uses of national income data.

7. The following table shows the national income data for a country.

Item RM million
Gross Investment 1,500
Government Expenditure 2,000
Consumption Expenditure 3,000
Indirect taxes 500
Subsidies 600
Exports 1,100
Imports 1,000
Depreciation 400
Net Property Income from Abroad 200
EPF Contribution 50
Transfer Payment 100
Undistributed Profit 200
Income Taxes 150

Given that the population of this country is 25 million. Calculate the
followings:

a) GDP at market Price.
b) GNP at factor cost.
c) National income.
d) Personal income.
e) Disposable income.
f) Income per capita.

9

8. The following table shows the National Income data for a country in year
2015.

Items RM billion

Consumption Expenditures: 36,854
Public 143,650
Private
39,469
Investment Expenditures: 40,746
Public 1,592
Private 419,266
356,415
Changes in stock (inventories) -25,627
Exports of goods and services 12,000
Imports of goods and services 15,625
Net Factor Income Abroad 18,248
Capital Consumption
Indirect taxes
Subsidies

Based on the above information, calculate the followings:

a. Gross domestic product (GDP) at market price.
b. Gross national product (GNP) at market price.
c. National Income (NI)
d. If consumer price index (CPI) for year 2015 is 140 and the year 2014 is the

base year, find the real gross national product (real GNP) for year 2015.
e. Given the Gross National Product (GNP) in year 2014 is RM200, 000, find

the rate of economic growth between year 2014 and 2015.

9. The following table shows the value of nominal GDP and price index for the
year 2015, 2016 and 2017.

Year Nominal GDP Price Real GDP Growth
(RM billion) Index Rate
2015
2016 58,000 110
2017 72,000 115
86,000 112

c) Find the real GDP for each year.
d) Using the real values, calculate the growth rate for the year 2016 and

2017.

10

ANSWERS TO Q1:

Refer to the following national income data for country
XYZ for the year 2014.

ITEMS RM (millions)

wages and salaries 1 060
rent 870
interest 880
distributed profit 1 200
proprietor’s income 780
depreciation 210
undistributed profit 150
transfer payment 90
social security contribution 80
personal income tax 130
net factor income from abroad 70

ANSWER:

To calculate:

iv) Gross domestic income
= wages + rent + interest + Dis Profit + proprietors’
income + Undis. Profit
= 1060 + 870 + 880 + 1200 + 780 + 150
= 4940

v) Gross national income
= GDI + NFIFA
= 5010

iii) National income
= GNI – depreciation
= 5010 – 210

= 4800

iv) Personal Income
= NI – undistributed profit + transfer payment – social contrbtn
= 4800 – 150 + 90 – 80

= 4660

v) Disposable Personal Income
= PI – personal income tax
= 4660 – 130

= 4530

11

Q2. The table below contains items from the national income account of
a country.

ITEMS RM (million)

Consumption 11,800
Government services 9,200
Mining and Quarrying 8,000
Finance, insurance and other services 9,600
Manufacturing 28,000
Rent 23,000
Subsidies 790
Wholesale and retail trade 11,200
Agriculture, forestry and fishing 15,600
Transport, storage and communication 6,400
Construction 3,800
Profit 4,800
Electricity, gas and water 1,900
Tax on expenditure 15,000
Net Factor income from abroad 8,250
Depreciation 23,000

To Calculate:
i) GDP at market prices using the product (output) approach.

GDPmp = G. Services + mining + finance + manufacturing +
wholesales + agriculture + transport +
construction + electricity.

= 9200 + 8000 + 9600 + 28000 + 11200 + 15600 + 6400
+ 3800 + 1900

= 93700 mil.

ii) GNPfc = GDPmp + NFIFA – tax on expenditure +
Subsidies

= 93700 + 8250 – 15000 + 790

= 87740

iii) NI = GNPfc – depreciation
= 64740

12

ANSWERs TO Q3: Fill in the blank with appropriate answers.

Items RM Millions
Consumption expenditures 11,200
Investment spending 8,790
Government expenditures 10,150
Exports 7.800
Imports -(8,250)
(i) 29690
Gross Domestic Product at
market prices -(2,780)
3,150
(ii) expenditure taxes
Subsidy (iii) 30060
5,420
Gross Domestic Product at -(6,150)
factor cost
(iv) 29330
Income received from abroad -(1,180)
Income paid abroad
(vi) 28150
Gross National Product at -(800)
factor cost
- (1,200)
(v) depreciation of capital -(2,350)
National Income
Undistributed profit 900
Corporate income tax (vii) 24700
Social security contribution
Transfer payment

Disposable Income

13

ANSWER TO Q4: RM (billion) RM (billion)

items 100 100

private expenditure =I 160 365
Export = X
Import = M 154 132
taxes on expenditure
business taxes 88 160
personal taxes
consumer expenditure = C 40 - (154)
government purchased of goods
and services = G 26 i) GDPmp = 603
property gain from abroad 365 12
property paid abroad 132 - (5)
depreciation
transfer payment GNPmp = 610
social contribution
12 - (88)
ii) GNPfc= 522
5
72 - (72)
iii) NNI = 450
50 - (40)
20 + 50

- (20)

iv) PI = 440

- 26

v) DI = 414

14

Q5. The table below shows the national income data for an economy for 2008
with a population of 10 million.

Items RM (million)

Private consumption 255,660

Public Investment 28,565
Corporate investment 56,240

Net property income from abroad -15,895
Government expenditure 27,770

Increase in inventory - 4,510
Depreciation 22,265

Gross profit from public enterprise -15,555
Wages 59,905

Taxes on expenditure 32,676

Calculate:
(k) Gross Domestic Product at market prices

(l) Gross Domestic Product at factor cost
(m) Gross National Product at market prices

(n) Gross National Product at factor cost
(o) Net National Income

(p) National Income per capita
(g) Explain why the values of the following items as

in the table above are negative:
i) Net property income from abroad
ii) Increase in inventory.

(h) Name the method used in the calculation above.
(i) Give another two (2) methods of computing the national income

data.

15

ANSWER:

5. The table below shows the national income data for an economy for 2001
with a population of 10 million.

Items RM (million) RM (million)
Private consumption 255,660
Public Investment 28,565 255 660
Corporate investment 56,240
Net property income from abroad -15,895 28 565
Government expenditure 27,770
Increase in inventory - 4,510 56 240
Depreciation 22,265
Gross profit from public enterprise -15,555 27 770
Wages 59,905
Taxes on expenditure 32,676 - (4510)

a) GDPmp = 363725

- taxes on exp (32676)

b) GDPfc = 331 049

- NPIFA (15 895)

+ taxes on exp 32676

c) GNPmp = 347830

- taxes 32676

d) GNPfc = 315154

- depctn (22 265)

e) NNI = 292 889

c) Gross National Product at market prices
GDPm.p = GDPf.c. + taxes on expenditure
GNPf.c. = GDPf.c + NFIFA

Therefore,
GNPm.p. = GDPf.c. + taxes on expenditure + NFIFA

d) Gross National Product at factor cost
GNPf.c. = GNPm.p. – taxes on expenditure

e) Net National Income = GNPfc - depreciation
f) National Income per capita

= NNI / Population = 292 889 / 10 = 292 88.9

16

g) Explain why the values of the following items as in the table above are
negative:
i) Net property income from abroad
ii) Increase in inventory.

h) Name the method used in the calculation above.
i) Give another two (2) methods of computing the national income data.

Q6. a) Refer to the same information below to answer the following questions.
(But each question is independent to one another)

Indirect taxes RM750 mil.
Subsidy
Depreciation RM610 mil.
Net factor income from abroad
Personal income tax RM205 mil.
RM –80 mil.

RM120 mil.

v) If GDP at factor cost is RM27,860 millions, find GDP at market price.
vi) If GDP at factor cost is RM35,600 millions, find GNP at factor cost.
vii) If national income is RM47,300 millions, find GNP at factor cost.
viii) If GDP at market price is RM38,300, find GNP at factor cost.

b) List two uses of national income data.

17

ANSWER RM750 mil.
RM610 mil.
6. Given: RM205 mil.
- RM 80 mil.
Indirect taxes RM120 mil.
Subsidy
Depreciation
Net factor income from abroad
Personal income tax

i) If GDP at factor cost is RM27,860 millions,
find GDP at market price.
= GDPfc + indirect taxes – subsidies.

= 27860 + 750 - 610

= 28000

ii) If GDP at factor cost is RM35,600 millions,
find GNP at factor cost.
= GDPfc – NFIFA
= 35600 – (80)

= 35520 mil.

iii) If national income is RM47,300 millions,
find GNP at factor cost.

= NI + depreciation

= 47300 + 205

= 47505

iv) If GDP at market price is RM38,300,
find:
GNP at factor cost.
= GDP mp - NFIFA – indirect taxes + subsidies.

18

= 38300 - (80) - (750) + 610
= 38080
a. List two uses of national income data.

i) to measure and compare the standard of living and the
development of a country.

i) to compare the performance of a country over time: using the
measurement of economic growth (the rate of change of real
GDP).

ii) to analyse the contribution of each sector of the economy.
iii) To assists government economic planning.

19

Q7. The following table shows the national income data
for a country.

Item RM million
Gross Investment 1,500
Government Expenditure 2,000
Consumption Expenditure 3,000
Indirect taxes 500
Subsidies 600
Exports 1,100
Imports 1,000
Depreciation 400
Net Property Income From Abroad 200
EPF Contribution 50
Transfer Payment 100
Undistributed Profit 200
Income Taxes 150

Calculate the followings:

g) GDP at market Price.
h) GNP at factor cost.
i) National income.
j) Personal income.
k) Disposable income.

ANSWER:

8. The following table shows the national income data for a country.

Item RM million

Gross Investment 1,500
Government Expenditure 2,000
Consumption Expenditure 3,000
Indirect taxes - (500)
Subsidies 600
Exports 1,100
Imports - (1,000)
Depreciation - (400)
Net Property Income From Abroad 200
EPF Contribution - (50)
Transfer Payment 100
Undistributed Profit - (200)
Income Taxes 150

20

To calculate the followings:

a) GDP at market price.
= 1500 + 2000 + 3000 + 1100 - (1000)
= 6600

b) GNP at factor cost.
= GDPmp – NFIFA –indirect taxes + subsidies.
= 6600 - + 200 – 500 + 600

= 6900

c) National income.
= GNPfc – depreciation

= 6500

d) Personal income. - Undistributed Profit

= - EPF Contribution + Transfer Payment

= - (50) + 100 - 200

= 6350

e) Disposable income.
= PI – income taxes
= 6350 – 150

= 6200

21

Q8. The following table shows the National Income data for a country in
year 2015.

Items RM billion
Consumption Expenditures:
36,854
Public 143,650
Private
Investment Expenditures: 39,469
Public 40,746
Private 1,592
Changes in stock (inventories) 419,266
Exports of goods and services 356,415
Imports of goods and services -25,627
Net Factor Income Abroad 12,000
Depreciation 15,625
Indirect taxes 18,248
Subsidies

Based on the above information, calculate the followings:

a. Gross domestic product (GDP) at market price.
b. Gross national product (GNP) at market price.
c. National Income (NI)
d. If consumer price index (CPI) for year 2015 is 140 and the year

2014 is the base year, find the real gross national product (real
GNP) for year 2015.
e. Given the Gross National Product (GNP) in year 2014 is
RM 200,000 find the rate of economic growth between year 2014
and 2015.

ANSWER:

a) Gross domestic product (GDP) at market price.
GDP m.p. = 36845
+143650
+39469
+40747
+1592
+419266
-356413
325162

22

b. Gross national product (GNP) at market price.

GNP m.p. = GDPm.p. + NFIA
= 325 162 – 25 627

= 299535

c. National Income (NI)
National Income = GNP f.c. – Depreciation
GNPf.c. = GNPm.p. – Indirect Tax + subsidy
= 299535 – 15625 + 18 248
= 302158
NI = GNP f.c. – Depreciation
= 302158 –12 000
= 290158

d. If consumer price index (CPI) for year 1999 is 140 and the year 1998 is the
base year, find the real gross national product (real GNP) for year 1999.

CPI 1998 = 100 (base year)
CPI 1999 = 140

real GNP = P0 X nominal GNP
P1

= 100 X 302158
140

= 215827.14

e. Given the Gross National Product (GNP) in year 1998 is RM200, 000 find the
rate of economic growth between year 2014 and 2015.
Growth rate = ( 215827.14 – 200, 000) X 100
200,000

= 7.9%

23

ANSWERS TO Q9:
The following table shows the value of nominal GDP and price index for the
year 2015, 2016 and 2017.

Year Nominal GDP Price Real GDP Growth
(RM billion) Index Rate
2015 52727.27 -
2016 58,000 110 62608.7 18.74
2017 72,000 115 76785.71 22.64
86,000 112

a) Find the real GDP for each year.

real GDP2015 = P0 X nominal GDP
P1

= 100 X 58,000
110

= 52727.27

b) Using the real values, calculate the growth rate for the year 2016 and
2017.

Growth rate = ( 62608.7 – 52727.27) X 100
52727.27

= 18.74%

24

ESSAYS:
1. a) Define national income.

b) Explain the differences between GDP at market prices and GNP at
market prices.

c) What are the problems encountered when we use national income
estimates to compare standard of living between countries.

2. a) Explain two types of government expenditures.
b) Explain 3 problems in calculating national income.

3. a) Briefly define the term “national income”.
b) Explain the uses of the national income data.
c) The problems faced in national income calculation.

4. Explain with the use of a circular flow model the reasons why all the
approaches give rise to the same measurement.

25

Chapter 5 Monetary Economics

Answers to QUESTIONS TO PONDER (page 92):

CHAP 5: Monetary Economics

1. The following data shows the money supply in Malaysia in
a year.

Items RM Millions
Paper money 10,500
Coins 5,900
Savings deposits in other financial 28,580
institutions
Savings deposit in commercial 44,660
banks
Fixed deposits in commercial 55,600
banks
Negotiable certificates 25,000
Fixed deposit in other financial 27,520
institutions
Savings at Bank Simpanan 15,690
Nasional (GIRO)
Current deposits in commercial 30,650
bank
Bank Negara Certificates 12,220
Savings at Bank Islam Malaysia 23,400
Berhad (BIMB)

a. Calculate the total money supply M1.
M1 = 10500 + 5900 + 30650
= 47050

b. Calculate the total money supply M2
M2 = 47050 + 44660 + 55600 +25000 +12220
= 184530

c. Calculate the total money supply M3.
M3 = 184530 + 28580 + 27520 + 15690 + 23400
= 279720

Azizah Isa.UiTM Kelantan2005 49

Chapter 5 Monetary Economics

d. Calculate the amount of broad quasi money.
Broad Quasi Money = M3 – M1
= 279720 – 47050
= 232670

2. The table below shows detail information of the

monetary items of a country.

Items RM Millions

Coins 13,300

Fixed deposits in other 26,880

financial institutions

Savings deposit in 44,660

commercial banks

Fixed deposits in commercial 55,600

banks

Negotiable certificates 25,000

Savings deposit in other 25,580

financial institutions

Current deposits in 30,650

commercial bank

Bank Negara Certificates 15,000

Calculate:

a) Bank notes if Fiat Money is RM39, 000 millions
Bank Notes = dollar = 39 000 – 13 300

= 25 700

b) M1 = 39 000 + 30 650 = 69 650

c) M2 = 69 650 + 44 660 + 55 600 + 25 000
+ 15 000

= 209 910

Azizah Isa.UiTM Kelantan2005 50

Chapter 5 Monetary Economics

d) M3 = 209 910 + 26880 + 25 580
= 262 370

e) Narrow quasi-money
= M2 – M1 = 209 910 - 69 650 = 140 260

f) Broad quasi-money
= M3 – M1 = 262 370 - 69 650 = 192 720

g) Give 4 functions of money

Four Main Functions of Money:
i. As a Medium of Exchange
ii. As a Standard Measurement /
unit of account.
iii. As a Store of Value

iv. As a Standard of Deferred
Payment

Azizah Isa.UiTM Kelantan2005 51

Chapter 5 Monetary Economics

3. Below is the data for monetary aggregates released by the
Ministry of Finance for a country known as Megajaya for
the year 2016 and 2017.

ITEMS $ (million)

No. Year 2016 Year 2017

i. Repurchase Agreement (Repo) 15 000 16 000

ii. Currency in circulation 23 000 19 000

iii. Demand deposits 43 000 34 000

iv. Fixed deposits with the
commercial banks and central 185 000 190 500
bank.

v. Foreign currency deposits with 6 800
commercial banks and central 5 500
bank.

vi. Deposits placed with other

banking institutions 10 500 13 000

vii. Savings deposits with 25 500 28 500
commercial banks

viii. Negotiable Instruments of 26 000 24 500
Deposits (NIDs)

b) Calculate the percentage change in simple money supply,
M1, between the year 2016 and 2017.
Simple or narrow money supply, M1
M1 (2006) = 23000 + 43000 = 66000
M1 (2007) = 19000 + 34000 = 53000
Therefore, %MS = (66000 – 53000) X 100 = 24.53%
53000

Azizah Isa.UiTM Kelantan2005 52

Chapter 5 Monetary Economics

c) Calculate the value for broad money supply for 2016.
Broad MS, M2 = M1 + Repo + FD + FCD + SD + NID
= 66000 + 15000 + 185000 + 5500 +
25500 + 26000
= 323000 +

d) Calculate the value for broader money supply for the 2016.
Broader MS, M3 = M2 + Deposits other banking institution
= 323000 + 10500
= 333500

e) What is the value of narrow quasi money in 2016.
Narrow Quasi Money = M2 – M1
= 323000 – 66000
= 257000

4. The following table shows a balance sheet of bank F.
(all figures are in million ringgit)

Assets BANK F 500,000
Cash Reserves 500,000
Loans Liabilities
Total 50,000 Current Deposits
450,000
500,000 Total

a) Calculate the cash reserve ratio of Bank F.
b) Based on the cash reserve ratio in (a) above, how

much credit can be created by Bank F?
c) Now, a loan of RM450,000 is given by Bank F to a

borrower and deposited it in another bank known as
Bank G. Assumes that the cash reserve requirement is
still the same, show the new balance sheet of bank G.
d) Then, calculate the money supply created by bank G.

Azizah Isa.UiTM Kelantan2005 53

Chapter 5 Monetary Economics

a) Calculate the cash reserve ratio of Bank F.

Cash Reserve Ratio (CRR) = Cash Reserve X 100%
Current Deposits

= 50,000 X 100%
500,000

= 10%

AZIZAH ISA 83

b) Based on the cash reserve ratio in (a)
above, how much credit can be created
by Bank F?

Credit Created = [ 1 x ID ] - ID
CRR

= [ 1 x 500,000 ] - 500,000
10%

= [100 x 500,000] – 500,000
10

= 4,500,000

AZIZAH ISA 84

Azizah Isa.UiTM Kelantan2005 54

Chapter 5 Monetary Economics

c) Now, a loan of RM450,000 is given by Bank
F to a borrower and deposited it in
another bank known as Bank G. Assumes
that the cash reserve requirement is still
the same, show the new balance sheet of
bank G.

Asset RM (mil.) Liabilities RM(mil.)
Cash Reserves 45,000 Current Deposit 450,000
Loans 405,000
Total 450,000 Total 450,000

AZIZAH ISA 85

d) Then, calculate the money
supply created by Bank G.

Credit Created at Bank G
= [ 1 x ID ] - ID
CRR
= [ 1 x 450,000 ] - 450,000
10%
= [100 x 450,000] – 450,000
10
= 4,050,000

AZIZAH ISA 86

Azizah Isa.UiTM Kelantan2005 55

Chapter 5 Monetary Economics

5.Given the liquidity reserve requirement is 12%. Saver’s known as S
deposited he money RM44,000 in Bank A.

a) Find the excess reserve by Bank A and draw a balance
sheet table of Bank A.
Excess Reserve = 100 -12 = 88%
Total amount of Excess reserve = 88/100 x 44,000
= 38,720

LRR=12% = 12/100 x 44,000 =5,280

or;
44,000 – 38,720 = 5,280

Balance sheet for Bank A

Assets Liabilities

LRR (12%) 5,280 Initial Deposits 44,000

Loans (88%) 38,720

Total 44,000 Total 44,000

b) Calculate the money supply created by Bank A.

MS Created = [1/LRR x ID ] - ID
MS Created = [100/12 x 44,000 ] – 44,000

= 322,666.7

c) If another saver, T deposited in bank A an amount of
RM89,000. Find the increased in money created by Bank A
now.

MS Created = [1/LRR x ID ] - ID

MS Created = [100/12 x 89,000 ] – 89,000
= 652,666.7

Azizah Isa.UiTM Kelantan2005 56

Chapter 5 Monetary Economics

The increased in MS = 652,666.7 – 322,666.7
= 320,000

d) If the reserve requirement has been increased to 15%. Find
the amount of money created by Bank A now.

With ID now is RM89,000,
And LRR is 15% .

MS Created = [1/LRR x ID ] - ID

MS Created = [100/15 x 89,000 ] – 89,000

= 504,333.3

Azizah Isa.UiTM Kelantan2005 57

CHAPTER 5;
PUBLIC FINANCE

Structured Questions:

1. The data below shows various types of tax in an economy

Type of tax RM million

Taxes on companies revenue 3.6
Individuals income tax 2.5
Excise duties 1.6
Petroleum revenue tax 2.8
Custom duties 2.0
Tax on imported goods 3.5

i) How much is the total direct taxes?
Direct Tax = 3.6 + 2.5 + 2.8 = 8 .9

ii) How much is the total indirect taxes?
Indirect Tax = 1.6 + 2.0 + 3.5 = 7.1

2. Given that the economy with;
C = 400m + 0.6 Yd, I = 1000m and G = 5000m.

i) Determine the equilibrium national income.

Y = 400 + 0.6Y + 1000 + 5000
Y - 0.6Y = 6400

0.4Y = 6400
Y = 6400/0.4
Y = 16000

ii) If the income at full-employment is RM 8500m , find the spending by
government to achieve this full-employment.

∆Y = m ∆G
∆G = ∆Y / m

= (8500 – 16000) / (1 / 0.4)
= - 7500 / 2.5
= - 3000
(contractionary fiscal policy instead)

iii) Now assume tax is impose is 20 million, calculate the new equilibrium income
with tax.
Y = 400 + 0.6 (Y - 20) + 1000 + 5000
Y = 6400 + 0.6Y - 12
Y - 0.6Y = 6388
0.4Y = 6388
Y = 6388/0.4
Y = 15970

iv) Now, the government spends a total of RM1700m for the year. Find the new
equilibrium income.

∆Y = m∆G
= (1 / 0.4) (1700)
= 2.5(1700)
= 4250

New Equilibrium Y = 15970 + 4250 =20220

v) Is the government implementing a surplus or deficit budget?
G = 1700 + 5000 = 6700m
T = (20 m)

Therefore, T < G ,
20m < 6700m thus, is a deficit budget.

ANSWERS TO QUESTION TO PONDER:

CHAPTER 6: INFLATION AND UNEMPLOYMENT

Structured Questions

1. The table below shows the total labor force, number of employed and unemployed
people for country Kembangan.

Year Total labor force (‘ 000) Employed (‘ 000) Unemployed (‘ 000)
__7650_______ 850
2005 8,500 1,450
8,600
2006 _10,050_________

a) Fill in the blanks with appropriate answers.

b) Calculate the unemployment rate for 2005 and 2006.
For 2005:
µ = 850 X 100 = 10%

8,500

For 2006:
µ = 1,450 X 100 = 14.4%

10,050

c) State two types of unemployment:
Any 2 of:
i) frictional
ii) seasonal
iii) structural
iv) hidden

2. Given the following nominal income and price index of a country and various years:

Year Nominal Income (RM) Price Index
2007 255,000 100
2008 285,000 112
2009 290,000 114

Find the rate of inflation for the year 2008 and 2009 and then, calculate the real income
for each year.

Rate of inflation for 2008 = 112 -100 = 12%

Rate of inflation for 2009 = 114 – 112 X 100 = 1.79%
112

Real Income for 2008 = 100 X 285,000 = 254464.29
112

Real Income for 2009 = 100 X 290,000 = 254385.96
114

3. Understand the graph below and answer the following questions.

General AS
Price

P1

P0

AD1

AD0
Real Output

Y

a) State the macroeconomic problem that may arise in this economy?
Inflation

b) And then explain under what condition and how this economy was forced to face this
macroeconomic problem.
The macroeconomic problem of inflation here is due to the increase in AD.

c) State two (2) policy measures that can solve this macroeconomic problem. Briefly
explain how these policies can be used to cure the problem in this economy.
i) contractionary fiscal policy (surplus budget):
to cure inflation is by increasing tax and reducing government
spending.
ii) contractionary monetary policy:
to cure inflation is by reducing money supply and increasing
interest rate by the use of any of the monetary tools such as the
OMO, discount rate, reserve requirement.

d) Briefly explain how may the value of money falls in an economy?
Value of money falls as inflation rises due to the fll in the purchasing power of
money falls as price increases.

Essay Questions

1. a) Describe five (5) types of unemployment.
b) Discuss the ways that unemployment problem can be solved?

2. Explain the effects of unemployment.

3. Discuss two types of inflation.

4. What are the effects of inflation?

Multiple Choice Questions:

1. Which of the following type of unemployment is generally of the shortest duration?

A. Structural B. Disguised

C. Frictional D. Cyclical

ANSWER: C

2. Unemployment that is caused by economic decline or recession is called

A. frictional unemployment B. cyclical unemployment

C. national unemployment D. technological unemployment

ANSWER: B

3. If total population of a country is 18 million, total labor force is 190,000 and total

employment is 189,600; the unemployment rate for that country is

A. 0.2% B. 0.7% C. 6.9% D. 99.4%

ANSWER: A

µ = 190,000 - 189.600 x 100 = 0.2%
190,000

4. Assuming total population is 200 million, the labour force is 100 million, and 92 million

workers are employed. The unemployment rate is

A. 4% B. 6% C. 8% D. 10%

ANSWER: C

5. To solve the unemployment problem, the fiscal policy that should be implemented is:
A. To reduce tax and reduce government expenditure
B. To increase tax on income and to increase government expenditure
C. To increase tax and reduce government expenditure
D. To reduce tax rate and increase government expenditure.

ANSWER: D

CASE STUDY

Q1. Define inflation and state the measurement to measure inflation.

Definition:
Is the continuous increase in the general price level in an economy.

Measurement of inflation:
Rate of inflation = PI1 – PI0 X 100
PI0

Q2. Explain how the removal of subsidy may has an impact on inflation and there will be
more people that is said to be in the group of ‘new poor’ in the economy.
Once subsidy is removed prices will increase and consumers’ purchasing power
will fall. As prices increase more people can’t afford to pay for the high prices of
goods , thus there are more poor people in the economy.

Q3. Briefly explain how inflation may raise the cost of living of the public.
As inflation rises, price increases thus, cost of living will increase.

Q4. Discuss what is a minimum wage legislation and then explain why the government need
to introduce the minimum wage legislation as inflation rises in the economy.
As price increase, the labour union will asked for higher wages. This will cause
much higher prices and may cause to spiral inflation too. As wage increase cost
of production will increase and again will increase the price. Therefore the
government need to control much higher wages and need to fix a standard wage
to stabilizes prices and inflation in the economy.