5. State whether each of the following concerns microeconomic or macroeconomic.

Discuss with your tutor.

UNIVERSITI TUNKU ABDUL RAHMAN
FACULTY OF BUSINESS AND FINANCE (a)
ACADEMIC YEAR 2020/2021
SESSION 202101

TUTORIAL 1
INTRODUCTION TO PRINCIPLES OF ECONOMICS (TOPIC 1)

 Part I: Ice-breaking session.

 Part II: Explanation of unit plan (inclusive of course syllabus, course requirement, and
examination format).
 Part III: Explanation of group assignment (inclusive of questions, forming groups and any
relevant matters on assignment).
 Part IV: Discussion of economic concepts that related to the syllabus.

Others: Classroom ground rules by tutor.

1. Which one of the following best describes the study of economics? Economics
studies
(a) how businesses can make profits.
(b) how the government controls the economy and how people earn a living.
(c) how society uses its scarce resources to satisfy its unlimited desires.
(d) the allocation of income among different sectors of the economy.
(b)
2. Macroeconomics approaches the study of economics from the viewpoint of
(a) individual consumers.
(b) the government.
(c) the entire economy.
(d) the operation of specific markets.

3. Which of the following is most appropriately a microeconomic issue?

(a) The study of the relationship between the unemployment rate and the inflation
rate
(b) The forces determining the price level in an individual market
(c) The determination of total output in the economy
(d) The aggregate behavior of all decision-making units in the economy

4. Which of the following is NOT listed in the book as a reason to study economics?
(a) to learn a way of thinking
(b) to understand society and global affairs
(c) to be an informed voter
(d) to learn how to make lots of money

1 2
 (d) “If the economy is currently producing at point ‘U’, the only way to produce more of
TUTORIAL 2 cooking oil is by producing less of the guns”. Do you agree with this statement?
PRIINCIPLES OF ECONOMICS (TOPIC 1) Explain your answer.

1. For each of the following, list whether the topic is microeconomic or macroeconomic in (e) What eventually happens to the PPF when new capital is being built and employee
nature: training programs enhance the skills of the labor force in this economy? Use diagram
to explain your answer.
a) The price of test book
3. In the following graph, Country XYZ is currently at PPF0. Which of the production
b) In 2018, Malaysia’s inflation rate was 4.7% possibilities frontier (PPF) in the given graph best describes the following scenarios?

c) Fish prices have increased as a result of higher tariff rate

d) The amount of national output in an economy

PPF3
2. Imagine a country that produces military goods and consumer goods, which is ‘guns’ and
‘cooking oil’. Table 1 shows the combination of guns and cooking oil produced in this Capital Goods
country. PPF2
PPF4
Point Guns Cooking Oil
A 120 0 PPF1
B 100 30 PPF0
C 80 60 Consumer Goods
D 60 90
E 40 120
F 20 150 (a) People from Country ABC have moved to Country XYZ.
G 0 180
(b) There is technological advancement in the production of capital goods.
(a) Calculate the value of opportunity cost if the country changes its production level
from: (Reminder: Show all steps of calculation) (c) Climate change has caused the production of consumer goods to decrease.

(i) A to B (d) There is a huge drop in Country XYZ’s economy growth.

(ii) C to D
(iii) E to F 4. Assumes Country X is producing capital goods and consumer goods at constant
opportunity cost;
(b) Based on your answer in (a), draw a production possibilities frontier (PPF) for guns
and cooking oil. Explain the shape of this PPF. (a) What does constant opportunity cost mean? Explain your answer by using an
appropriate diagram.
(c) Show the point that represents an economy with the level of unemployment rate at
50%. Label it as ‘U’, and explain your answer. (b) As Country X enhanced production of capital and consumer goods, the production
possibility frontier (PPF) will rotate outward. Do you agree with this statement?
Explain by using an appropriate diagram.

3 4
5. Refer to the following diagram. TUTORIAL 3
DEMAND, SUPPLY, MARKET EQUILIBRIUM AND ELASTICITIES (TOPIC 2)

1. The demand and supply schedules for Good X are as follows:

A D

C B Demand Supply
Price (RM) Quantity (units) Price (RM) Quantity (units)

9.00 70 6.00 100

0
Steel 8.00 100 7.00 130
(a) Which point is unattainable?
7.00 130 8.00 160
(b) To achieve this currently unattainable production combination, what must happen 6.00 160 9.00 190
(two possible answers)?

(c) Will a movement from B to A increase corn production or steel production? a) Sketch the demand and supply curves for the Good X.

(d) What is the opportunity cost of moving from C to B? b) Determine the equilibrium price and quantity.

c) Suppose the price is currently at RM9. What problem would exist in the economy?
What would you expect to happen to price?

d) Suppose the price is currently at RM6. What problem exists in the economy? What
would you expect to happen to price?

2. The demand and supply functions of grapefruit are Qd = 450 – 6P and Qs = 50 + 2P

respectively.

P = Price (RM)
Qd = Quantity demanded (Kg)
Qs = Quantity supplied (Kg)

a) Calculate the equilibrium price and quantity for the market of grapefruit.

b) Numerically describe the following cases:

(i) The price change to RM60:

(ii) The price change to RM20

5 6
3. Consider the market for PCs, laptop, and computer software. TUTORIAL 4
DEMAND, SUPPLY, MARKET EQUILIBRIUM AND ELASTICITIES (TOPIC 2)
a) For each pair, identify whether they are complements or substitutes by using an
appropriate explanation: 1. Answer the questions below based on the information given in table:
(i) PCs and computer software
(a) Fill in the missing amounts in the table above.
(ii) PCs and laptop
(b) Would you recommend that BC’s move forward with a plan to raise prices if the
b) Suppose a technological advance reduces the cost of manufacturing PCs. Graphically company’s only goal is to increase revenue?
explain the effect of this improvement to equilibrium price and quantity in the market
for PCs. (c) Would you recommend that the seller of flower cut prices to increase revenue during
UTAR’s convocation day?
c) Based on (b), draw a new diagram(s) to show how the change in the market for PCs
affects the market for: (d) The manager on Broadway fun fair is thinking to reduce the price of ticket as a way
to attract more people comes to the fun fair. He assumes that by doing so, it will raise
(i) Computer software its total revenue because they may sell more ticket when the price reduced. Do you
agree with his idea? Explain your answer.
(ii) Laptop
2. Table below shows the price of Good A, quantity demanded (Qd) and quantity supplied (Qs)
of Good A, quantity demanded (Qd) of Good B and consumer’s income (Y).

Good A Good A (Qd) Good B (Qd) Good A (Qs) Consumer’s

(Price) RM Income (Y)

20 80 50 500 2200
16 120 60 400 1900
12 150 70 300 1500
8 200 80 200 1300
4 240 90 100 1000

a) Calculate the price elasticity of supply for good A when the price rises from RM4 to
RM12 by using midpoint method and indicate whether the supply is elastic, unit
elastic or inelastic.

b) Calculate the cross price elasticity of demand for good B when the price of A
increases from RM8 to RM12 by using formula point method. Are A and B
complements or substitutes?

c) When the income for consumers increases from RM1500 to RM2200, calculate the
income elasticity of demand for good B by using formula point method. What type of
product is good B?

7 8
3. Suppose that the estimated household good consumptions in Malaysia are as follows:
(a) Fill in the table above for market demand and market supply.
Goods 1995 2000 2005 2010
(b) Draw market demand and market supply curves based on the answer in (a) and label
A 150 100 86 80 all values and price. In your answer, also show equilibrium price and equilibrium
B 111 117 130 142 quantity.

C 950 861 783 704 (c) If there is an increase of household’s income, draw an appropriate diagram to see
what will happen to equilibrium price and equilibrium quantity in this market
D 140 175 225 240
(assume that brown rice is an inferior good). Explain your answer.
E 246 350 400 450
(d) Using midpoint method, calculate price elasticity of supply in market of brown rice
F 288 221 186 166 when price of this good increases from RM9.00 to RM9.50 per kg. (Write your
answer in 2 decimal points)
a) If household income rose between each of the years (assuming that all other factors
remained constant), which of the goods shown in the table above are inferior goods? (e) As a result from increased in price of brown rice from RM9.00 to RM9.50, demand
Why? for wheat increased from 800kg to 1000kg. Calculate the cross elasticity of demand
by using formula method. What is the relation between brown rice and wheat?
b) If the price of Good A increased from RM5 to RM6 from 2000 to 2005, what is the
cross elasticity demand of Good F in 2005? What do the sign imply about the 6. Suppose the market demand for pizza is given as Qd = 300 – 20P and the market supply for
relationship between these two goods? Use formula point method. pizza is given as Qs = 20P – 100, where P = price (per pizza in RM).

4. Market research has revealed the following information about the market for personal
(a) In equilibrium, how many pizza would be sold and at what price? Mathematically
computer (PC). The demand scheduled can be represented by the equation P = 8000 – 2QD,
prove your answer.
and the supply schedule can be represented by the equation P = 2000 + QS, where QD is
the quantity demanded, QS is the quantity supplied and P is the price.
(b) Assume that government has imposed price ceiling at RM8.00. What will happen in
the market? Show and calculate the area of consumer surplus, producer surplus and
(a) Calculate the equilibrium price and quantity in the market for PCs.
deadweight loss before and after the price ceiling?
(b) Suppose that government wants to protect consumers from paying unreasonable price
charged by sellers by imposing price ceiling of RM3000. What will happen in the
market?

5. Table below shows the quantity demanded and quantity supplied for brown rice:

Price per kg Quantity Demanded (kg) Quantity Supplied (kg)

(RM) Individual Market Individual Market Supply
Demand Demand Supply
7.00 50 45
7.50 45 50
8.00 40 55
8.50 35 70
9.00 30 75
9.50 25 80

There are 150 households and 75 sellers of brown rice in this market.

9 10
 TUTORIAL 5 b) Based on your answer above, calculate marginal utility per dollar for pizza and coke
CONSUMER PREFERENCES AND CHOICES (TOPIC 3) if the price of pizza is $2 per slice and price of coke is $1 per can.

1. The schedule below shows Darren’s total utility gained from the consumption of waffle c) What are the possible combinations of slices of pizza and cans of coke?
and corn. The price of waffle is RM2 while the price of corn is RM4.
d) Based on your answer in part (c), calculate total amount of money needed to buy
Units of waffle Total Utility of Units of corn Total Utility of each of the mentioned combinations. Which combination will maximize consumer
waffle corn utility if his/her income is $10?
0 0 0 0
1 14 1 28 e) If income decreases to $7, what would happen to existing budget line? Graphically
2 26 2 40 explain your answer. Will the slope of budget line change? (Label Pizza on vertical
3 36 3 48 axis)
4 42 4 52
5 46 5 54 3. Draw a budget constraint that is consistent with the following prices and income.

Income = $200;
(a) Calculate the marginal utility per ringgit of waffle and marginal utility per ringgit of PY = $50;
corn. PX = $25
(b) How many units of waffle and corn will Darren consume to maximize his utility if a) Demonstrate how your original budget constraint would change if income increases
his income is RM 16? to $500.
(c) Calculate the new marginal utility per ringgit of waffle when the price of waffle b) Demonstrate how your original budget constraint would change if PY decreases to 20.
increases to RM4 while the price of corn and income remain constant. What will be
his new consumption level? c) Demonstrate how your original budget constraint would change if PX increases to 40.
2. Answer the following questions. 4. A consumer with RM3, 000 monthly incomes allocate his income on buying two different
goods, orange juice and chicken rice. (Label chicken rice on horizontal axis)
a) Complete the table below.
(a) If the price of orange juice is RM3 a glass and the price of chicken rice is RM6 a
No. Slices Total Marginal No. Cans Total Marginal plate, what is the marginal rate of substitution at this optimum? Graphically show a
of Pizza Utility Utility of Coke Utility Utility consumer’s budget constraint and indifference curve for orange juice and chicken
Pizza Pizza Coke Coke rice at the optimum level.Calculate the slope of budget line. What will be the slope of
0 0 0 - indifference curve at the optimum level?
1 20 1 20
(b) If the consumer’s income is increased to RM6000, graphically show a consumer’s
2 36 2 15 budget constraint and indifference curve for orange juice and chicken rice at the
optimum level (use original price of orange juice and chicken rice. Will the slope of
3 46 3 10 budget line change? Explain your answer.
4 52 4 5
5 54 5 3
6 51 6 -1

11 12
 TUTORIAL 6
THE PRODUCTION PROCESS OF FIRM (TOPIC 4) (b) Without scale, graph total cost (TC), total variable cost (TVC) and total fixed cost
(TFC). Explain the reason for the shape of these three curves.
1. Suppose a company owned by Jacky incurs the following costs:
Labor RM40,000 (c) Without scale, graph average total cost (ATC), average variable cost (AVC) and
Equipment RM30,000 average fixed cost (AFC) and marginal cost (MC).
Materials RM10, 000
Jacky owns the building, so it doesn’t have to pay the usual RM7000 in rent. At the 6. The following table shows the relationship between total product of good X and the
first year of operation, total revenue (TR) is RM150,000. Calculate accounting cost, number of workers employed.
economic cost, accounting profit and economic profit.
Land 10 10 10 10 10 10 10 10 10 10
2. Edison runs a studio in Kampar. He hires Andrew as a part-time helper at RM2,000 per Capital 1 1 1 1 1 1 1 1 1 1
month. He pays his monthly rent at RM1,400 and he has invested all his savings on Labour 0 2 4 6 8 10 12 14 16 18
equipment at RM8,000 per year. Edison originally works at a bakery shop with the salary Marginal - 12.5 8 7.5 5.5 4 2.5 1 0 -1
of RM1,800 per month before he starts his own studio. His savings could have paid him Product
the interest of 2% per year initially. Edison’s studio earns revenue of RM80,000 for the
(a) Calculate the total product and average product.
year. Calculate Edison’s explicit cost, implicit cost, accounting profit and economic profit
for the particular year.
3. It is possible for a firm to have diminishing marginal return and at the same time (b) With the aid of diagrams (without scale), draw TP, MP and AP. Also state and
diseconomies of scale? explain the three stages in the production function.

4. Suppose the demand for bridge crossings Q is given by P = 15 – 0.5Q. If the toll bridge
operator raised the toll from RM 5 to RM 7, at this new price, would the toll bridge
revenue increase or decrease? Justify.

5. Based on the table below, answer the following question:

Output TVC ATC
(Unit) (RM) (RM)
1 115 165
2 175 112.5
3 215 88.33
4 275 81.25
5 355 81
6 455 84.17
7 575 89.29
8 715 95.7

Where;
TVC = Total Variable Cost ATC = Average Total Cost
TC = Total Cost AVC = Average Variable Cost
MC = Marginal Cost AFC = Average Fixed Cost

(a) Calculate total cost (TC), marginal cost (MC), average variable cost (AVC) and
average fixed cost (AFC) for the output level 1 to 8.

13 14
 TUTORIAL 7 4. The following is some data about costs for a single firm:
MARKET STRUCTURE: PERFECT COMPETITION (TOPIC 5)
Quantity TR TC TVC MR MC
1. Suppose that a perfectly competitive market is initially at long run equilibrium. Graphically 0 0 5 0 ---- ----
explain how the firm and market adjust in the long run if there is a permanent decrease in 1 12 12 7 12 7
the demand of the product. 2 24 22 17 12 10
3 36 33 28 12 11
2. Assume a single firm in a purely competitive industry has variable costs as indicated in the 4 48 45 40 12 12
following table in column 2. 5 60 60 55 12 15
6 72 78 73 12 18

Total Total Average Average Average Marginal (a) Identify the level of fixed costs for this firm.
Product Variable Fixed Variable Total Cost
Cost Cost Cost Cost (b) Calculate the marginal cost and marginal revenue.
(RM) (RM) (RM) (RM) (RM)
0 0 (c) How many units should the firm sell to maximize its profit and calculate its level of
1 60 profit?

2 110 5. Jennifer's Carpet Cleaners, is one of perfectly competitive firm has fixed costs of $100 per
3 150 month and a total cost curve as given in the table below. Output is the number of carpets
cleaned. Given this data, answer the questions below.
4 210
5 280 Output (kg) Total Cost (RM)
10 200
6 360 20 320
7 450 30 460
40 620
8 550
50 800
9 670 60 1000

(a) If the current price for cleaning a carpet is RM18. How many carpets must be
(a) At total fixed cost is RM150, complete the table above.
cleaned to maximize profits? What will the profit (loss) at this output level?
(b) At a product price of RM50, what will its profit or loss? Will this firm produce in the
(b) Suppose the price falls to RM14. Calculate the profit-maximizing output and the total
short run? Explain.
profits.
(c) At a product price of RM70, what will its profit or loss? Will this firm produce in the
short run? Explain. (c) Based on your answer in (ii), draw an appropriate diagram to show the profit/loss.
Will the firm continue or shut down its operation? Explain your answer.
3. “The short-run supply curve is the portion of marginal cost curve that lies above the break-
even point”. Do you agree with the statement? Explain by using an appropriate diagram.

15 16
6. A perfect competitive industry has fixed costs of $16 and average variable costs as follows: TUTORIAL 8
IMPERFECT MARKET STRUCTURES: MONOPOLY, MONOPOLISTIC
Quantity Average Variable Cost COMPETITION AND OLIGOPOLY (TOPIC 6)
(Unit) ($)
1. Based on the below graph, answer the following questions:
0 0
1 1
2 2
3 3
4 4
5 5
6 6

a) Compute marginal cost.

b) At the price of $9, does the firm earning economic profit?

c) At the price of $7, does the firm earning economic profit?

d) Based on the answer in what will happen to the market price if this market makes the
transition to its long-run equilibrium?

a) The profit-maximizing level of output for the monopoly is

b) The profit-maximizing price for the monopoly is

c) Calculate the monopolist’s total revenue, total cost and profit or loss.

2. The graph below illustrates a monopoly market where the firm maximizes profit by setting
price at RM60 and the quantity where marginal revenue (MR) equals to marginal cost
(MC). If this market were perfectly competitive, the price would equal marginal cost;
therefore the equilibrium price and quantity would be RM40 and 20 respectively. Compute
the amount of consumer surplus, producer surplus and total surplus at the equilibrium
under monopoly compared to perfect competition.

17 18
 Price and Cost (RM) Price (RM)

d1 MC2
90
36
MR1
A
35 •X MC3
MC1
60 32

MC
28 •Y
B
C

40 D E
25 •W d2
30
F
MR Demand
•Z
Quantity 0 20 25 35 Quantity
0 12 20 30 MR2
15

3. Answer all following questions: (i) If the marginal cost is MC1, what are the profit maximizing price and quantity?

(a) A pure monopolist determines that at the current level of output the marginal cost of (ii) If the marginal cost curve shifts from MC1 to MC2, what are the new equilibrium
production is $2.00, average variable costs are $2.75, and average total costs are price and output?
$2.95. The marginal revenue is $2.75. What would you recommend that the
monopolist do to maximize profits? (iii) Calculate the level of total revenue if marginal cost is at MC1 and MC2.

(b) A pure monopolist sells output for $4.00 per unit at the current level of production. (iv) What will happen to the equilibrium price and quantity if the marginal cost shifts
At this level of output, the marginal cost is $3.00, average variable costs are $3.75, from MC1 to MC3?
and average total costs are $4.25. The marginal revenue is $3.00. What is the short-
run condition for the monopolist and what output changes would you recommend? (v) State two (2) assumptions of the kinked demand curve.

4. When the industry is in long-run equilibrium, the monopolistic competitor will produce at
the lowest point on its long run average cost curve. Do you agree with this statement?
Graphically explain how the monopolistically competitive firm might reach the long-run
equilibrium.

5. Explain the concept of excess capacity and mark up over marginal cost for the case of
monopolistically competitive industry.

6. The following graph shows a profit maximizing firm in an oligopoly market.

19 20
 TUTORIAL 9 TUTORIAL 10
INTRODUCTION TO MACROECONOMICS (Topic 7) MEASURING NATIONAL OUTPUT AND NATIONAL INCOME (Topic 7)

1. Describe briefly the following effects of inflation. 1. Based on the table below, calculate the value added for each of the firm and the value
added by all firms.
2. Based on the below table answer the following questions. Calculate to one decimal place. Stage of Sales value of
production product
Year CPI
1 160 Firm A RM 1600
2 165
Firm B RM 2500
3 170
4 177 Firm C RM 3700
Firm D RM 5200
a) What was the percentage rise in prices between year 1 and 2?
Firm E RM 7600
b) What was the percentage rise in prices between year 2 and 3?
2. Using the data below, answer the following questions.
c) What was the percentage rise in prices between year 3 and 4?
Components of GDP (billions of RM)
3. What is meant by the term business cycle? Graphically explain the phases of business
cycle in the economy. Consumption 10130
Consumption on durable goods 1095
4. Identify the type of unemployment occurring in each of the causes below and explain your
answer. Consumption on nondurable goods 2308
Consumption of services 6727
a) Susan recently lost her job because the company she works downsized after poor Investment 2136
sales and poor performance of the economy.
Federal Government Purchases 1083
b) Jenny recently left her marketing job at a local bank because she found that finance State and local Government Purchases 1800
interests her more. She is currently looking for a job as a financial consultant. Transfer Payments 700
Exports 1831
5. Briefly describe the four types of unemployment with relevant example for each.
Imports 2539
6. Country XYZ has a population of 26 million citizens in 2016. The labor force participation Receipts of factor of income from the rest of the world 445
rate is 68% and the number of employed person is 17 million. (Answer in 2 decimal points) Payments of factor income to the rest of the world 303
Retained earnings 1096
(i) Calculate the number in the labor force.
Personal income tax 1433
(ii) Calculate the number of unemployed workers.
a) Calculate Gross Domestic Product (GDP) by using expenditure approach.
(iii) Calculate the unemployment rate.
b) Calculate Gross National Product (GNP)
(iv) Country XYZ has determined that the natural rate of unemployment is 3%. How
many cyclical unemployment workers are there? c) Calculate the personal income, if the national income is RM12, 635 billion.

d) Calculate disposable personal income.

21 22
3. The following table shows the national income for an economy in year 2010. 5. In year 1, the prices of goods X, Y and Z are RM3, RM5 and RM7 per unit, respectively.
In year 2, the prices of goods X, Y and Z are RM4, RM5 and RM8, respectively. In year 2,
Items RM (Million) twice as many units of each good are produced as in year 1. In year 1, 25 units of X, 45
Consumption 1,149.5 units of Y and 65 units of Z are produced. If year 1 is the base year, what does Real GDP
Corporate profit 491.9 equal in year 2?
Investment 400.3
Rental income 145.0
Net interest 23.0
Government purchases 425.3
Proprietor’s income 400.0
Net Export 89.1
Income earned by the rest of the world 56.0
Capital consumption allowance 303.8
Income earned from the rest of the world 50.0
Depreciation 5
Indirect business taxes 213.3
Compensation of employees 800.0
Subsidies 20
Corporate profit taxes 77.7
Social Security insurance taxes 216.5
Transfer payment 405.6
Personal taxes 340.0

Based on the above data, calculate:

(i) National income

(ii) Calculate Gross Domestic Product (GDP) using income approach.

(iii) Calculate Gross Domestic Product (GDP) using expenditure approach.

4. Which of the following are included and which are excluded in calculating this year’s GDP?

a) A monthly scholarship check received by an economics student.

b) The purchase of a new truck by a trucking company.

c) The purchase of a used tractor by a farmer.

d) Social Security checks received by a retired person.

e) Income from illegal drug activities.

f) The person who purchases a health care product.

23 24
 TUTORIAL 11 b) Using the multiplier approach, calculate the new equilibrium income level if
AGGREGATE EXPENDITURE & EQUILIBRIUM OUTPUT (Topic 8) investment increase by RM50 million.

1. The following functions are related to the economy of a country. c) Using the multiplier approach, calculate the new equilibrium income level if there is
a tax cut of RM50 million.
Consumption expenditure:
C = 100 + 0.8Y 5. Given below is data of an economy.
Investment Expenditure: I = 200
Government spending: G = 500
Consumption (C) = 500 + 0.8Yd
Investment (I) = 350
(i) Calculate marginal propensity to save (MPS) Government expenditure (G) = 400
Tax (T) = 150
(ii) Derived the saving function. (all values are in RM million)

(iii) Determine the country’s equilibrium output level. Based on the above data, answer the questions below:

2. Calculate the changes in real GDP that would result in each of the following cases: (a) Find the value of marginal propensity to save (MPS).
a) Government purchases rise by RM8500, and the marginal propensity to save (MPS) (b) Derive the saving function.
is 0.2.
(c) Calculate the equilibrium level of national income.
b) Investment spending falls by RM8 billion, while at the same time government
purchases rise by RM32 billion. The marginal propensity to consume (MPC) (d) Using the multiplier approach, calculate the new equilibrium national income if
is 0.6. the government increases salaries for government servants by RM30 million.

3. Answer the following questions: (e) Illustrate your answer in (d) by using an appropriate diagram.
a) Suppose an economy is initially in equilibrium at RM800 billion and I increases by
RM10 billion. This causes the economy to expand to RM1200 billion. Calculate the
value of the multiplier.

b) Suppose the slope of the consumption function is 0.75 and there was an increase in
income of RM100. Calculate the increase in consumption.

c) Suppose that Malaysia has an MPC of 0.8 and real GDP of RM200 billion. If its
investment spending decreases by RM2 billion, what will be its new level of real
GDP?

4. Using the following information in the case of three sectors economy;

a) Calculate the equilibrium level of national income with taxes (RM million).
Consumption = 200 + 0.75Yd
Investment = RM 100 million
Taxes = RM 100 million
Budget deficit = RM 100 million

25 26
 TUTORIAL 12 TUTORIAL 13
FISCAL & MONETARY POLICY (Topic 9) AGGREGATE DEMAND – SUPPLY MODEL (Topic 10)

1. Describe briefly on how central government can overcome the following situation: 1. Explain the three reasons given for the downward slope of the aggregate demand curve.

a) Unemployment: 2. Suppose that the price of petrol in Malaysia had increased from RM1.80 per liter to
RM2.50 per liter. This has created a price shock in the economy.
b) Inflation;
(a) Using aggregate demand and supply graph, explain the impact of the increasing in
2. Graphically explain how each of the following policy actions by the central bank would the price of petrol to the price level and aggregate output.
affect the money market equilibrium in an economy by using money demand (Md) and
money supply (Ms). (b) Using the result from part (a), explain and show (in a new diagram) on what
(a) A decrease in the required reserve ratio. happen if the government increases its spending to bring aggregate output back to
previous level.
(b) An increase in the discount rate
3. Describe the effect of the following events would have on the aggregate demand (AD)
(c) The central bank sells government securities to the public. curve.

3. Explain briefly on how BNM can implement the contractionary monetary policy? (a) A boost in research and development by computer companies produces more
powerful and efficient computers and equipment.
4. “Crowding-out effect is the increase of investment caused by a decrease in government
spending’. Do you agree with this statement? Explain your answer by using an (b) Income falls in several countries that trade heavily with the Malaysia.
appropriate diagram(s).
(c) After a budget surplus, government moves to cut personal income taxes.
5. A continuous substantial rise in the general price level is harmful to the community’s
social economic interest, in terms of current welfare and future economic development. 4. In the following case, illustrate and explain the impact on output and price level by using
Fiscal policy is one of the policies that can be used to reduce these pressures on economy. AD-AS model.
Define “fiscal policy”. Graphically illustrate using aggregate expenditure diagram (Y=AE
approach) and explain how this policy can be used to control inflation. (a) Decrease in the demand for goods & services.

(b) Government cuts in personal income tax rates.

5. In 1995 there was a severe drought in Malasca. As a result of the drought, approximately
two-third of the country’s agriculture crops was destroyed. The Malasca government is
considering a number of policies to counter the effect of the drought on the economy, and
one of the actions taken by the monetary authority in Malasca is one-time increases in the
money supply. Using AD-AS approach, indicates how the drought and the policy action of
Malasca’s government would affect the overall price level and level of equilibrium
aggregate output.

6. Differentiate between demand pull inflation and cost push inflation.

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 TUTORIAL 14
INTERNATIONAL TRADE AND EXCHANGE RATE (Topic 11) 5. Use the table below calculates:

1. Describe briefly the difference between absolute advantage and comparative advantage. Current account RM
Goods exports 8,000
2. Table 1 shows the production possibilities of hand phones and notebooks for two Goods import 10,000
countries, Japan and Korea. Export of services 2,500
Import of services 2,000
Table 1: Production of hand phones and notebooks for Japan and Korea Income received on investment 3,500
Country Hand phones Notebooks Income payments on investment 3,000
Japan 50 90 Net transfer payments -500
Korea 30 60
Total 80 150 a) Net exports of goods

(i) Which country has a comparative advantage in the production of hand phones? b) Net export of services

(ii) Which country has a comparative advantage in the production of notebooks? c) Net investment income

(iii) What would be the total output of each the products if each country specialized d) Net transfer payments
completely according to its comparative advantage?
e) Balance on current account
3. The following table is about the output of computer and mobile phone produced by China
and U.S.

Country Computer Mobile Phone

China 800 200
U.S 500 1000
Total 1300 1200

(a) Which country has the absolute advantage in production of computer? Which
country has the absolute advantage in production mobile phone?

(b) Which country has comparative advantage production of computer? Which

country has comparative advantage in production of mobile phone?

(c) What is the total output of each of the production if each country specialized
completely according to its comparative advantage?

4. List and describe the three most common trade barriers.

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