COURSE

MACROECONOMICS
SEMESTER 1 2023/2024
SET 9

GROUP PROJECT REPORT

PROFESSOR:
DR NORLAILA ABU BAKAR

NAME MATRIK ID

SARAH BINTI SAIFUDDIN A204411

ALISA TASNIM BINTI MOHD NOR HISYAM A204416

CHENG SHIHAN A199381

1. a) Discuss factors that contribute towards increase in price/inflation rate in Malaysia in
2023.

There are several factors that can contribute towards an increase in price or
inflation rate in Malaysia in 2023. First of all, rising demand. Increase in consumer
demand for food goods and services can lead to higher prices. This is because businesses
raise prices to balance the demand and supply equation. When the demand exceeds the
supply, and the businesses unable to compile to it, an increase in prices will happen and
that leads to inflation. For example, Padiberas Nasional Bhd (Bernas) announced that the
price of imported white rice had increased by 36% to RM3,200 from RM2,350 per metric
tonne. The situation has become acute in recent months due to shortages of rice in
Malaysia after top exporter India restricted some shipments in July, hence the shortage
did not balance with the consumer’s demands of rice supplies, sending global prices
skyrocketing.

Next, Changes in government policies, such as subsidies or taxes, can directly

influence prices. Reductions in subsidies or increases in taxes can lead to higher prices
for certain goods and services. For example In October 2023, the government lifted the
minimum price of paddy, last reviewed in 2014 from RM1,200 per metric tonne to
RM1,300 per tonne.

Furthermore, External Economic Conditions where economic conditions in major

trading partners or globally can impact Malaysia's economy, affecting its inflation rate.
For an instance, Padiberas Nasional Bhd (Bernas) announced that the price of imported
white rice had increased by 36% to RM3,200 from RM2,350 per metric tonne. It was
reported that the price increase was driven by, among others, falling harvests in
rice-exporting countries due to climate change. These factors were also compounded by
the ban on exports by India, the world’s largest rice exporter.

Last but not least, Currency Depreciation, if the Malaysian Ringgit depreciates
against other currencies, the cost of imported goods may rise, contributing to inflation.

All in all, all of these factors contributed to the increasing of price and inflation in
Malaysia.
b) Based on an appropriate economic theory, suggest policies to overcome the increase in price.

Based on economic theory, there are three policies that can overcome the increase in price such
as monetary policy, fiscal policy and supply side policy.

What is monetary policy? Monetary policy can be defined as a set of tools to control the
overall money supply by the nation's central bank, employ strategies such as revising interest
rates, changing bank reserve requirements and promote economic growth (Team, 2023). To
counter the rise of price or prevent increase in inflation rate, monetary policy can be one of the
alternatives to overcome this issue by reducing money supply. For instance, central banks can
adopt a more restrictive monetary policy by raising interest rates. Higher interest rates make
borrowing increasing, reducing consumer spending and business investment which can help curb
inflation. Central banks also can engage in open market operations to sell government securities,
thereby reducing the money supply and increasing interest rates.

Shifting to the other alternative which is fiscal policy that can be described as the use of
government expenditures and taxation strategies to impact economic circumstances, particularly
macroeconomic factors such as overall demand for goods and services, employment, inflation,
and economic growth (Hayes, 2023). Fiscal policy can control inflation rate by reducing
government spending as it can help to minimize overall demand in the economy. Besides, raising
taxes is also a fiscal policy that can help to reduce consumer spending leading to decrease in
aggregate demand.

Ultimately, the supply-side policy can refer to the government striving to enhance
productivity and efficiency in the economy. If these efforts succeed, they will move aggregate
supply (AS) to the right, paving the way for sustained long-term economic growth (Pettinger,
2019). This policy focuses on improving productivity and can help address cost push inflation.
For example, investments in education, technology and infrastructure can enhance the efficiency
of the economy. Supply-side policy also can promote a flexible labor market, such as reducing
labor market rigidities, can enhance competitiveness and reduce inflationary pressures.
 2. C）Explain the rational of Central Bank increasing Overnight Policy Rate (OPR)
in Malaysia throughout the year 2023.

OPR is the overnight interest rate set by Bank Negara Malaysia (BNM). This interest rate is the
rate at which commercial banks borrow or lend money to each other overnight.

To reduce this risk, BNM sets the Overnight Policy Rate (OPR), which is the rate at
which banks must lend to each other overnight. The OPR helps to smooth out and regulate
interest rates, preventing them from fluctuating too wildly for consumers and businesses. Thus,
the OPR is a key tool for BNM to manage the country's economy.

When BNM increases the OPR, it signals that it wants to reduce the amount of money in
circulation and control inflation. As a result, banks will increase the interest rate they charge on
loans, which is known as their Standardized Base Rate (SBR). This, in turn, will increase the
monthly installments of home loans. Conversely, when BNM decreases the OPR, it signals that it
wants to stimulate economic growth by increasing the amount of money and loans in circulation.
In turn, banks will lower their SBR. This will lower the monthly installments of home loans or
reduce the repayment period to encourage more takeup for loans. It is important to note that only
variable interest rates will be affected by any changes in the OPR, while fixed interest rate loans
remain unaffected. Loans with variable interest rates tend to offer lower interest rates but have
the risk of fluctuating. Loans with fixed interest rates tend to have higher interest rates but with
the guarantee of stability.

BNM also increases interest rates to support the stability of the national currency. Higher
interest rates can attract foreign capital seeking better returns, which may lead to an appreciation
of the Ringgit Malaysia. This is particularly important for Malaysia, a country with open
economies that are sensitive to changes in capital flows.

Global economic conditions can impact Malaysia's economic outlook. If there are
concerns about external risks, such as inflation in major trading partners or fluctuations in
commodity prices, a BNM will adjust the OPR to mitigate potential adverse effects on the
domestic economy. Such as what the situation with India during the rice conflict.
References :

1. Pettinger, T. (2019, November 30). Supply side policies. Economics Help.

https://www.economicshelp.org/macroeconomics/economic-growth/supply-side-policies/
2. Hayes, A. (2023, December 19). All about fiscal policy: what it is, why it matters, and
examples. Investopedia. https://www.investopedia.com/terms/f/fiscalpolicy.asp
3. Team, I. (2023, March 17). Monetary Policy Meaning, types, and tools. Investopedia.
https://www.investopedia.com/terms/m/monetarypolicy.asp
4. FONG, F. (2023, July 2). Rice prices in Malaysia increase by 10-15% in one week?. TRP.
https://www.therakyatpost.com/news/malaysia/2023/07/02/rice-prices-in-malaysia-increa
se-by-10-15-in-one-week/
5. Malay Mail. (2023, November 9). Malaysia’s price controls keep rice production low,
exacerbating shortages.
https://www.malaymail.com/news/malaysia/2023/11/09/malaysias-price-controls-keep-ric
e-production-low-exacerbating-shortages/101073
a. Bank Negara Malaysia. (2023). Overnight Policy Rate (OPR).
https://www.bnm.gov.my/
6. The Edge Markets. (2023). Understanding the Overnight Policy Rate (OPR).
https://www.theedgemarkets.com/
7. iMoney Malaysia. (2023). How Does the Overnight Policy Rate (OPR) Affect You?
https://www.imoney.my/
8. CompareHero. (2023). What You Need to Know About the Overnight Policy Rate (OPR)
in Malaysia. https://www.comparehero.my/