INFLATION

1.1: DEFINITION

1. It reduces a person’s income by reducing the purchasing power of money .

2. “too much money is purchasing too few goods and services”
3. Three main criteria to determine inflation ;
a) Increase in general price level
b) continuous increase in price level
c) unlimited increase in price level
1.2: DEGREE

1. Moderate inflation

 rate of the inflation rises by less than 10% per annum.

 is a stable inflation and not a serious economic problem.

2. Creeping inflation

 Known as mild inflation.

 Prices rise by not more than (up to) 3% per annum.

3. Stagflation
 recession occur simultaneously and remain unchecked for a period of time.

4. Hyperinflation
 Prices rise at an alarmingly high rate (above 1000% per annum)

5. Deflation
 A sustained decline in the price level of good and services.
 rate of the inflation falls below 0% (negative inflation rate)
1.3: CAUSES

1. Demand-pull inflation
 Excess demand for goods and services (shortage)

2. Cost-push inflation
 When prices rise due to growing cost of production of goods and services.
1.4: EFFECTS
Generally affects total production, consumption and income distribution.

 Positive effects in inflation

1. Positive effects of internal

 Fixed property owner
 During inflation , the value of immovable property will increase and
the owner will gain
 Due to the surge in prices of assets
 Shareholders
 Share price will rise when inflation is moderate
 Shareholder will gain because higher profit for companies will mean
higher dividends
 Businessman/producers
 Prices are higher than the increase in cost of production
 General level of prices rise and producers make higher profits, leading
the producers to increase their level of production and investment.
 Debtor /borrower/credit recipient profits
 When the debtor repay the loan , it will be less than the real value of
the principal sum.

2. Positive effects of external

 Favorable terms of trade
 The export prices start to rise
 Negative effects in inflation

1. Negative effects of internal

 Fixed income earner/Pensioner
 Inflation reduces the individual’s real income and the value of money
 Will increase the gap between groups due to the differences in income
and thus worsen income distribution.
 Bondholders
 Real profit will decrease because they earn fixed interest.
 Savers
 interest rate returns may not cover the cost of inflation.
 The rising prices will erode away the purchasing power of such
savings.
 Creditors/lenders
 The lender imposes an interest rate on the borrower to cover the loss
caused by the inflation.

2. Negative effects of external

 Deficit balance of trade
 Export prices become more expensive thus reducing the total exports
and worsening the country’s balance of payment.
 Devaluation in exchange rate
 Total exports decline due to inflation in the country.
 Inflation that is devaluing money in the country will increase foreign
investment abroad
1.5: METHOD TO CONTROL INFLATION
 Monetary Policy to Combat Inflation
- Will decrease the money supply and credit creation
- Decrease the aggregate demand to stabilize the economic situation and to control
economic inflation

1. Contractionary Quantitative Monetary Policy

a) Raising statutory reserves requirement

 Central bank will increase the rate of statutory reserves

 The liquidity state of financial institution will decrease and would reduce the
ability of bank or other financial intermediary to provide loans to the public.

b) Raising minimum requirement of liquidated assets

 The more the requirement liquidated assets that are held, the lesser the credit
that can be created.

 To control Malaysian economics stability.

c) Sell government securities in the open market operation

 Decrease in consumer expenditure.

d) Increase bank rate or discount rate

 Reduces the loans to the banking sector

 Will lead to an increase in the cost of borrowing

 The liquidity state of financial institution will decrease and this will cause
the financial institution to reduce the loans to the public.

e) Raise interest rate

 Will increase the level of savings and decrease the purchase of goods and
services from the public.

f) Funding (funding buying long-term bonds)

 Causes a fall in the general public’s deposit and affects the money supply.
2. Contractionary Qualitative Monetary Policy
 Will discourage bank from borrowing in order to control inflation
 Aims at controlling and discouraging activities in specific economics sector.

3. Selective Credit Control

 Mains purpose to ensure that commercial banks provide loans and make
investment in accordance with government aspirations.

a) Tighten control on margin requirement

 Higher margin requirements will reduce the ability of people to buy shares
through a loan

 Control reduce the demand of money.

b) Tighten control on credit mortgage

 To discourage the public from buying properties

 Reducing their ability to obtain loans.

c) Tighten control on credit installment

 Reduces the activities of credit purchases.

d) Special directive

 Central bank will influence commercial bank to restrict lending policy which
will discourage borrowings.

4. Moral Persuasion

 Central bank can ask commercial banks to allocate certain funds to be given to
these loan seekers in productive sectors.
 Fiscal Policy to Combat Inflation
1. Contractionary Fiscal Policy or Surplus Budget Policy

 main aims is to control the excessive demand that causes the general price level
to increase.
 when taxes are increased and government expenditure is reduced, aggregate
demand will drop, and thus prevent the increase in the prices of goods and
services.

a) Decrease government expenditure

 Will directly affect aggregate demand

 A decrease in government spending and an increase in government’s total

tax revenue will produces a surplus budget.

b) Lower transfer payment

 Will eventually decrease aggregate demand in the economy.

c) Increase tax

 Will be a fall in demand, and with falling demand,price will fall, ceteris
paribus

 The people’s disposable income and their consumption of goods and services
will falls.

 A highly regressive tax structure can successfully reduce the impact of

inflation on the economy.
 Direct Control Policy to Combat Inflation
- to ensures fiscal policies and monetary reconsideration will be effective in
controlling inflation

1. Measures to overcome Demand-Pull Inflation

a) Price control

 Sets the maximum price, this will prevent sellers from selling the goods at the
higher price

 Government control the prices of goods by fixing a floor price and ceiling
price.

b) Rationing

 Can be done by issuing coupons to the public whereby consumer can

purchase limited goods and services using coupon

 Guarantees that the goods are also obtained by the needy and poor groups.

c) Anti-hoarding campaign

 Storing can causes artificial shortage and push prices up.

d) Compulsory savings

 By way of a deduction from the salary of workers that is credited to worker’s

account.

e) Increase the production of neccesity goods

 People can enjoy the output

 Output level can be increased and prices will be controlled.

2. Measures to Overcome Cost-Push Inflation

a) Control the increase of salary and wages

 If wages and salaries are not raised, cost of production and household
income will not increase. So, producers are not inclined to increase the
prices.

 Constant rate of salary of employees reduces the pressure of price increase.

 Government also negotiate with trade unions to control wage increase.

b) Control prices of raw materials

 Government may declare the raw materials as a controlled item.

 Also cam subsidize the production of raw materials

c) Reduces import tax on intermediate goods

 Will reduce production costs and reduces cost-push inflationary pressures.

d) Encourage the development of technology and labour productivity

 To promote technological development and improve efficiently and labor

productivity .

 Reduces production cost

 When production cost fall, aggregate supply curve will shift from left to
right.
 UNEMPLOYMENT

DEFINITION OF UNEMPLOYMENT
Its need to define labour force in order to understand the concepts of unemployment such as
full employment, unemployment, unemployed,under employment and discouraged worker.

1. Labour force

Defined as people from the total population above 16 years of age, who are nit in
institution, and who are either employed or unemployment but actively seeking
employment.

2. Full employment

Working labour force is employed to produce goods and services.

3. Unemployment
Labour force participants being available and willing to work but unable to find jobs.

4. Unemployed
People who are registered as able,available,and willing to work at the going wage rate
but who cannot find work.

5. Underemployment
Describe those who take on part-time jobs below their capability hut are seeking full-
time employment. Eg: a fresh graduate working as a salesperson in a supermarket.

6. Discouraged worker
Individual who wants to work but has been unsuccessful for a long period of time in
finding a job and who has consequently given up on seeking for jobs.

7. Part time workers vs Full time workers

Part time workers are those who work less than 35 hours a week than full time
workers.
TYPES OF UNEMPLOYMENT

1.Frictional unemployment

 Temporary, normal (few month)

 Factor: Imperfect information in labour market
: Fresh graduates , between jobs

2. Cyclical Unemployment

 Long term
 Involuntary to serious problems, during recession
 Factor:⬇ AD , ⬇ output , firm shut down , unemployment ⬆

3. Structural Unemployment

Changes in Technology, demand, ⬆ import

4. Seasonal Unemployment

 Temporary unemployment
 Factor: wealth, festive, season and fashion.
CAUSES OF UNEMPLOYMENT

 Business Cycle
 Low aggregate demand
 Drop in aggregate supply
 High population growth
 Technology advancement
 Immobility of labour
 Lack of workforce information
 Minimum wages policy
 Political instability
EFFECT OF UNEMPLOYMENT

Economy

 Ruins the economic growth

 Wastage of production resources
 Fall in national per capital income

Individual

 Loss of live hood and income

 Loss of job skills
 Loss of confidence

Society

 Family Dispute
 Social problems
 Low standard of living

Government

 Threats to political stability

 Increase in criminal rate
 Drop in government revenue
 Squatters problems
 Social and political problems
 Decline of government development activities
METHOD TO CONTROL UNEMPLOYMENT

Monetary
Policy
Commercial Bank
Individuals
Quantitative
 Deflation / unemployment
 Expansionary ( Supply of money increase)
 Minimum statutory reserves
 Minimum requirement of liquidated assets
 Buy government securities
 Decrease discount rate (loan)
 Reduce interest rate (savings)

Qualitative
 Selective credit control
 Reduce control on margin requirement
 Reduce control on credit mortgage
 Reduce control on credit installment
 Special directive
 Moral persuasion

Expansionary Tax increase Government expenditure also increase

Fiscal Policy

 Increase government expenditure

 Increase transfer payment
 Decrease tax
 Direct control
policy

Frictional Unemployment

 Disseminate labour market information

 Increase labour mobility
 Creation of new employment opportunities
 Encourage foreign investment

Structural and Technology Unemployment

 Upgrade of skills and technical education

 Increased investment in worker training
 Creation of more employment opportunities

Casual and Seasonal Unemployment

 Diversity economic activity

 Development of new land

Disguised / Hidden Unemployment

 Family planning in the long run

 Modernization of agriculture sector
 Improve level of education

Real Wage Unemployment

 Restrict labour union activity.