c) In your opinion, what is actually happen to the Malaysia economics today and shows

the evidence by using an appropriate statistical data.

I) Monetary Policy to Combat Inflation

 The government applies contractionary quantitative and qualitative monetary

policies which will decrease the money supply and credit creation and hence,
decrease the aggregate demand in order to stabilize the economic situation and to
control economic inflation.
 Contractionary Quantitative Monetary Policy
 There are various instruments of tools policies which the central bank employs to
achieve the goals of the economic policy, i.e. to combat inflation.

1. Raising statutory reserves requirement

During inflation, the central bank will increase the rate of statutory
reserves where the needs for savings of financial institutions will
increase. Following this, the liquidity state of financial instituations
will decrease and this would reduce the ability of banks or other
financial intermediary to prove loans to the public.This has the
effect of decreasing the money supply in the economy.

2. Raising minimum requirement of liquidated assets

During inflation ,the central bank will increase the rate of minimum
liquidity assets reserves requirement.Besides cash reserves
commercial banks also have to keep liquidated assets issued by
Bank Negara Malaysia such as treasury bills and government
securities.The more the required liquidared assets that are held,the
lesser the credit that can be created.The requirement minimum
liquidated assets are fixed by Bank Negara Malaysia and are used as
monetary policy tool to control the Malaysian economic stability.

3. Sell government securities in the open market operations

In times of inflation, the money supply has to be reduced.As such,
the central bank will sell government securities such as short-term
bonds treasury bills to commercial banks or to the public through
the banks.This results in the transfer of a part of bank deposits to
the central bank account and reduces the cash reserves and the
credit creation capacity of commercial banks.Cheques are also
made payable to the central bank.The result is a decrease in
consumer expenditure.
4. Increase bank rate or discount rate
During inflation , a high bank rate will be imposed by the central
bank to reduce the loans to the banking sector.This will lead to an
increase in the cost of borrowing which reduces the money owned
by financial institutions thus reducing loans to the
public.Consequently,the flow of money from the commercial banks
to the public gets reduced.Therefore increase in the bank rate
discourage borrowing.Following this, the liquidity state of financial
institutions will decrease and this will cause the financial
institutions to reduce loans to the public.

5. Raise interest rate

During inflation , the central bank may persuade commercial banks
to increase their rate of interest on deposits from the public.This
actions from commercial banks will increase the level of savings
and decrease the purchase of goods and services from the
public.Consumers look at the interest rate as costs of loans.The
higher the interest rate the lower the wish of consumers to
borrow.The same applies to loan repayment periods.Interest rate
can also be used to influence the cost of borrowing for
consumption.When money supply decrease the interest rate will
increase .This will cause the savings to increases,but discourage
investment and consumption.The central bank will raises interest
rates when it is trying to slow down the economy because of a fear
of accelerating inflation.

6. Funding (funding buying long-term bonds)

Funding is a process by which the government sells long-dated debt
rather than short-dated debt.Succesful funding of the national debt
means that the general public buy liquid securities,which causes a
fall in the general public’s deposit and affects the money supply.
 II) Fiscal Policy to Combat Inflation

 Contractionary Fiscal Policy or Surplus Budget Policy

1. Decrease government expenditure

The reduction in government expenditure will directly affect the aggregate
demand. The government will cut the salary of all the civil servants and
postpone its development its projects to reduce the purchasing power of the
public. A decrease in government spending and an increase the government’s
total tax revenue will produce the surplus budget.

2. Lower transfer payment

Decreasing transfer payment, e.g. decreasing payment to the tose affected by
recession, is another strategy as they will now have less money in heir pockets
thus reducing their spending which will eventually decrease aggregate demand
in the economy.

3. Increase tax
By increasing direct (not indirect) taxes, aggregate demand will drop and thus,
prevent the increase in the price of the goods and services. This means that
there will be a fall in demand, and with falling demand, price will fall, ceteris
paribus. Consequently, the people’s disposable income and their consumption
of goods and services will fall. A highly regressive tax structure can
successfully can reduce the impact of inflation on the economy.

III) Direct Control Policy to Combat Inflation

 Direct control measures is government intervention on economic activities to

ensure fiscal policies and monetary reconsideration will be effective in
controlling inflation. Direct control exercised by the government include the
following.
 Measures to Overcome Demand-Pull Inflation

1. Price control
The prices of certain goods can be controlled whereby the
government can implement a ceiling price policy, which sets
the maximum price for certain goods. This will prevent sellers
from selling the goods at a higher price than stipulated. As
such, procedures will not be able to increase prices according
to their wishes. The government will control the prices of
goods by fixing a floor and a ceiling price.

2. Rationing
At the time of inflation, government can control purchasing of
essential goods by implementing policies that involve
rationing. Rationing can be done by issuing coupons to the
public whereby consumers can purchase limited goods and
services using coupons. Total goods that can be purchased is
limited to the amount stated on the coupon. The policy
guarantees that the goods are also obtained by the needy and
poor groups.

3. Anti-hoarding campaign
This arises when reports are made against procedures and
consumers who store goods unnecessarily because such storing
can cause an artificial shortage and push prices up.

4. Compulsory savings
To control inflation, it is essential to introduce a compulsory
savings plan. This could be by way of a deducation from the
salary of workers that is credited to workers’ accounts. In
Malaysia, this body is know as the Employees Provident Fund
(EPF) where 11% of the workers’ wages and deducted every
month. The amount credited into the workers’ savings account
can only be withdrawn upon retirement.

5. Increase the production of necessity goods

At the time of inflation, governments can provide the
economic resources and undertake the manufacturing of
essential items so that people can enjoy the output. So, the
output level of the essential items can be increased and the
prices will be controlled.
 Measures to Overcome Cost-Push Inflation

1. Control the increase of salary and wages

Controlling the increase of salary and wages in the market too
can assist in the efforts to control inflation. If wages and
salaries are not raised, the cost of production and household
income will not increase. Thus, producers are not inclined to
increase prices. Government can implement maximum wage
policies to control the continuous increment. Wage controls
are intended to curb manufacturers from increasing the
production costs. The government could also negotiate with
trade unions to control wage increases.

2. Control prices of raw material

Increase in the price of crude or fuel will increase production
costs for firms. The prices of final products will go up as input
prices keep on rising. To control the prices of raw materials,
the government may declare the raw materials as a controlled
item. The government could also subsidize the production of
raw materials so that the raw materials are now available at a
price lower than the equilibrium price.

3. Reduce import tax on intermediate goods

The imports of intermediate goods are Malaysia’s most
important and the percentage of the total imports has increased
as a result of the rapid development of the manufacturing
industry. Reduction or exemption of import tax on raw
materials, components, machinery and equipment will reduce
production costs and reduce cost-push inflationary pressures.

4. Encourage the development of technology and labor productivity

Tax incentives are given to creative and innovative firms to
promote technological development and improve efficiency
and labor productivity. The will, in turn, reduce production
costs. When production costs fall, the aggregate supply curve
will shift from left to right.
 Measures to Overcome Import-Push Inflation

1. Control prices of consumers goods

The government intervenes to control prices of imported
consumer goods especially prices of food such as sugar and
beef. The government will also set the policies on the
maximum price for consumer goods that are regarded as
controlled items. Producers must obtain prior permission from
the government to raise the prices of these items.

2. Promote import substitution industries

To reduce dependence on imported goods, the government can
take steps to diversify the economy and encourage the
development of import substitution industries. Development of
import substitution industries allows the country to be more
self-reliant and less dependent on foreign countries for
industrial materials.

3. Increase local products to reduce imports

Increasing agricultural production not only reduces the current
account deficit but also addresses the problem of inflation,
particularly rising prices of imported food. By increasing local
food production, the dependence on imported food, which is
vulnerable to the risk of fluctuating international prices, will be
reduce.

4. Diversify sources of imports

The government and manufacturers may seek to find sources
of imports which are relatively cheaper in order to overcome
the problem of imported inflation. For imported foods and
agricultural inputs that cannot be produced locally, there must
be an effort to diversify sources of imports, particularly in
terms of finding the cheapest one.

5. Strengthen currency value to reduce the cost of imports

The appreciation of currency could affect the competitiveness
of exports, but the value of a strong national currency can also
reduce the cost of imported goods, especially raw materials
and fuel.