Tutorial 1 (Chapter 1: Macroeconomics)

1. Differentiate between microeconomics and macroeconomics. (4m)

Microeconomics is deals with activities and decisions of individual units or groups such
as consumers, household or firm. The example of the microeconomics is demand and
supply for labour and individual income. On top of that, macroeconomics is deals with
the entire nation or economy as a whole. For example, employment in the economy and
national income.

2. Explain the macroeconomics goals. (8m)

There have four macroeconomics goals which is full employment, economic growth,
price stability and equitable distribution of income. Full employment in which all
available resources in the economy are employed to produce goods and services. On top
of that, price stability is the objective of the nation is to keep its inflation rate as low as
possible maintaining price stability and inflation occurs when there is an increase in the
overall price level. Inflation can reduce the purchasing power of consumers. Besides, to
achieve the economic growth, the economy must be operating at maximum capacity and
the economic growth refer to an increase in the full production output level of a nation
over time. Other than that, one of the methods of achieving an equitable distribution of
income is taxation. When taxes are imposed, the higher income groups pay a higher tax to
the government.

3. Explain the conflict of macroeconomics goal.(9m)

The conflict of macroeconomics goal is to achieve full employment and maintain price
stability. On top of that, to achieve economic growth and a equilibrium in balance of
payments, Besides, to achieve economic growth and maintain price stability. Other than
that, if there is rapid economic growth, it is more likely that inflationary pressures will
increase. Inflation is particularly likely to occur when growth is above the long run trend
rate, and Aggregate demand increase than Aggregate supply. Apart from that, when
economic growth is led by consumer spending, it tends to cause a deficit in the current
account. This is because as consumer spending rises, there will be a rise in import
spending. This is especially true in the UK, where traditionally we have a high marginal
propensity to import (MPM). Also, high economic growth may increase inflation and
make exports less competitive. On top of that, if the government wants to boost the rate of
economic growth it could pursue expansionary fiscal policy such as tax cuts. This should
increase aggregate demand and help economic growth but there will be a side effect, the
budget deficit will rise. Besides, there is often a trade-off between unemployment and
inflation. In a period of high growth jobs are created, causing unemployment to fall. But,
as unemployment falls, it can put upward pressure on wages, leading to inflation. Other
than that, there can be a strong conflict on economic growth. Higher GDP leads to higher
levels of pollution and consumption of non-renewable resources.

4. Use a graph, explain the aggregate demand. (3m)

Aggregate demand is the total demand for goods and services produced in the economy
over a period. Aggregate demand is also the total planned expenditure on final good and
services produce domestically in the economy. A change in the price level causes a
movement along the aggregate demand curve.

5. Use a graph, explain the short run aggregate supply. (3m)

 In short run aggregate supply, a rise in the price level will cause an expansion of
aggregate supply while a fall in price level will cause a contraction of aggregate supply.
The graph above is upward slopping is because higher prices for goods and services make
output more profitable and enable businesses to expend their production by hiring less
productive labour and other resources

6. Differentiate short run aggregate supply and long run aggregate supply. (4m)

Short run aggregate supply changes in total planned output when prices level change while
long run aggregate supply indicates the economy’s productive capacity. In short run
aggregate supply, the prices and productivity of all factor inputs and the state of technology
are held constant while in long run aggregate supply, it is a measures a country’s potential
output and the concept is linked to the production possibility frontier (PPF).

7. List the components for aggregate demand. (5m)

There are five components of aggregate demand. First and foremost, the first
components are consumption which means the spending of household. Besides that, the
second component is investment. Investment is the spending on the capital goods and
inventory by firms exclude purchase of stock and bonds. Apart from that, the third
component is government spending and the fourth is export which means earnings from
overseas by selling goods to the other countries. Finally, the last component of aggregate
demand is import. Import means the spending on purchases the goods and services from other
countries.

8. Explain the factors that shift the aggregates demand to the right. (10m)

There are numerous reasons that cause the aggregate demand shift to the right. First and
foremost, the first reason is raised in consumption. When the interest rate had fall consumer’s
ability to pay back the loan will increase therefore, the consumption of the consumer will
increase. Other than that, when the income tax had fall, this will cause the ability of consumer
consume on the products or services increase.

Apart from that, the other reason that cause the aggregate demand shift to the right is rise in
investment. When the interest rate decrease, the business ability to pay back the bank loan
will increase. This will cause the cash flow of the business increase hence, they can expand
their investment. Therefore, this will cause them swift to modern technology which can help
them to increase their quality and quantity. When the quality of the product had increase, this
will attract more consumer to purchase their product. Thus, the aggregate demand will
increase.

Besides that, aggregate demand will swift to the right because there is a rise in government
spending. When there is an economic recession, government will increase their spending to
stimulate the economy. Therefore, government will decrease the price of the products such as
decrease the price of the house. When the price fall, there will attract more consumer to
purchases the house and the aggregate demand will raise.

In addition, the other reason is rise in export. When the quantity of export had increase,
there will be a lower exchange rate. This is because the other countries are willing to buy our
money therefore, this will cause a lower exchange rate. Moreover, when the export increase
there will have a strong growth in other countries. Therefore, rise in export will lead the
aggregate demand increase.
Finally, the last reason that cause the aggregate demand swift to the right because there is a
fall in import. When there is an import quota, this will cause the quantity import to decrease,
thus this will cause the citizen swift to buy the domestic products. Therefore, this will lead
the aggregate demand to raise.

9. Explain the factors that shift the aggregates demand to the left. (10m)

There are numerous reasons that cause the aggregate demand swift to the left. First and
foremost, the first reason that cause the aggregate demand swift to the left is fall in
consumption. When interest rate had increase, this will cause the consumer unable to pay
back the loan. Therefore, there will have a obvious fall on the aggregate demand.

Besides that, the other reason is fall in investment. When the business tax had increase, this
will cause the cost of the firm increase. Thus, this will affect the company unable to expand
their investment and the cash flow of the company will decrease. This will cause the
productivity of the company decrease due to unable swift to the modern technology.

Apart from that, the third reason is fall in government spending. When there is an economy
boom, government will decrease the spending to overcome the inflation problem. Therefore,
they will increase the price of the products. Hence, this will cause the aggregate demand to
decrease because consumers are not willing to purchases the products with the higher price.

Other than that, the reason that cause the aggregate demand swift to the left is fall in
export. When the quantity export had decrease, there will have an obvious decrease in
aggregate demand. This will cause the higher exchange rate and slow growth in other
countries. Therefore, fall in export will cause the aggregate demand swift to the left.

Finally, the last reason is rise in import. If there is a rise in import, the citizen will swift
purchase import products rather than purchase domestic products. Therefore, this will affect
the aggregate demand fall.

10. Sketch the diagram when

i.Government increase spending on education
ii.Decrease in investment

iii.Increase in labour productivity

iv.Increase in nominal wage rate

11. The following table gives information on the aggregate demand and aggregate supply
of an economy.

Price Levels AD AS
140 50 250
130 100 200
120 150 150
110 200 100
100 250 50

i.Draw the equilibrium of AD curve and AS curve.

ii.What is the equilibrium price and output for this economy.

Equilibrium price= 120
Output= 150

iii.Is it possible for this economy to reach the equilibrium at RM110? Give reasons for
your answer.
No, because AD is bigger than AS

iv.What is the new equilibrium price and output ?

Equibilium price= 130
Output= 200