Practise using AD/AS diagrams, components and shifts to analyse output, price levels, growth and inflation pressures.
What is a correct description of an aggregate demand (AD) curve?
It is a curve obtained by adding the market demand curves of all consumer goods traded in an economy.
It is a curve determined by the horizontal summation of all individual consumer demand curves for a product.
It is a curve that shows the total amount of goods and services firms are willing to buy at a given price in an economy.
It is a curve that shows the total demand of all goods and services produced at all price levels in an economy.
A government succeeds in changing a current account deficit into a current account surplus.
Why might this current account surplus increase the country's inflation rate?
It raises Aggregate Demand.
It raises production costs.
It reduces the exchange rate.
It reduces the money supply.
Malaysia's uncertain economic prospects
Malaysia is an emerging middle-income country. Its increasing population is an important factor in promoting future economic growth. The country, however, faces two underlying problems. First, the fertility rate, the average number of children a woman can expect to give birth to, has fallen consistently as Malaysia's economy has developed. This rate is now below the critical level where a population replaces itself. Second, Malaysia has an ageing population, with an increasing proportion of its population over 65 years of age. In 2015 the average age of Malaysia's population was 28.2 years; in 2030 it is forecast to reach 34.1 years. Malaysia's forecast total population to 2027 and its ageing population from 2017 to 2022 are shown in Figs. 1.1 and 1.2 below.
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Fig. 1.1 Total population of Malaysia, 2017 to 2027
The key issue for Malaysia's government is whether it is prepared for this fundamental shift in its population. There is plenty of scope for optimism. The economy appears to have recovered from the shock of the COVID-19 pandemic. Its growth rate in 2021 and the 2022 forecast was above the government's target of , with substantial growth in exports of electrical and electronic goods, palm oil, gas and oil supplies. Unemployment is below 4% and the current account of the balance of payments was projected to have a record surplus in 2022.
Economists, however, fear that Malaysia's government and its people are not ready to meet the challenges of an ageing population. In a recent survey, of respondents felt it was the duty of the young to take care of the elderly, but they were also concerned that the economy could not cope with the pressure on its human capital and other resources. More resources will have to be allocated to meet the needs of the elderly.
It was further argued that Malaysia needed a proper plan for dealing with this situation. According to one economist, free childcare for working parents was essential and tax incentives should be used to keep more elderly workers in employment.
Excluding net exports, assess the likely impact of the change in Malaysia's total population on aggregate demand.
Why would a fall in a country's average price level cause its aggregate demand curve to slope downwards?
It leads to an increase in interest rates.
It reduces the real value of money balances.
It makes the country's goods cheaper relative to foreign goods.
It leads to the expectation of further price falls.
The diagram shows a shift in the Aggregate Demand curve, from to .
What might have caused this shift?
a fall in the budget surplus
a fall in the trade surplus
a rise in imports
a rise in the interest rate
What is both a valid statement and consistent with the features of the diagram?
AS cannot be increased beyond some level of real output.
Consumption is a component of AD and is lower when the general level of prices is lower.
Investment is a component of AS and is independent of the general level of prices.
The greater the demand for a country's exports, the lower will be AD.
The diagram shows the aggregate demand (AD) and aggregate supply (AS) for an economy.
Which changes in subsidies and indirect taxes would have caused the change from to ?
higher subsidies and higher indirect taxes
higher subsidies and lower indirect taxes
lower subsidies and higher indirect taxes
lower subsidies and lower indirect taxes
Explain, with the help of a diagram, the difference between what causes (i) a movement along an aggregate supply curve and (ii) a shift in an aggregate supply curve.
The table illustrates macroeconomic data for an economy. All figures are in $ billions.
What is the equilibrium real output?
consumption
expenditure
investment
government
expenditure
exports
imports
real output
110
100
50
10
20
100
120
100
60
20
30
200
140
100
70
30
40
300
160
100
80
40
50
430
A major trading nation, country X, is in equilibrium at the full employment level of real output. There is then a recession in its main international markets.
What are the most likely consequences of this change for country X?
rate of inflation
unemployment
decrease
decrease
decrease
increase
unchanged
decrease
unchanged
increase