Macroeconomic Problem

CHAPTER
6
MACROECONOMIC PROBLEMS

LEARNING OUTCOMES

At the end of this chapter, students should be able to:

i) Define and measure inflation.

ii) Illustrate type and degree of inflation.
iii) Explain the effect of inflation and elaborate the measure to control inflation.
iv) Define and measure unemployment.
v) Discuss the types of unemployment.
vi) Explain the effect of unemployment and elaborate the measure to control unemployment.

SHORT NOTES

6.1 Inflation can be defined as continuous increase in the general price level of goods and services in
the economy.

Measures of inflation:
Inflation rate = (CPI this year-CPI last year/CPI last year) x 100

6.2 Type of inflation.

i) Demand pull inflation - when aggregate demand exceeds aggregate supply

ii) Cost push inflation - when cost of production increase for each unit of output produced

6.3 Effect of inflation – generally inflation will reduce purchasing power of customer since the price
of goods and services has increase. Besides, inflation will:

• Unequal income distribution

• An increase in investment and production
• The amount of saving will decrease
• Deficit in the balance of trade

6.4 Measures to control inflation by using:

i) Fiscal policy – to reduce expenditure in the economy
• Increase in taxes
• Decrease in government spending

ii) Monetary Policy – to reduce money supply in the economy

• Open market operation – selling government security and bond
• Raising the reserve ratio

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 Macroeconomic Problem

• Raising the discount rate/ bank rate

• Raising the interest rate

6.5 Unemployment can be defined as people between the age 16 and 65 who are not working but are
actively seeking jobs.

Measures of unemployment rate:

Unemployment rate (%) = (number unemployed/labor force)*100

6.6 Types of unemployment.

• Frictional unemployment
• Cyclical unemployment
• Structural unemployment
• Technological unemployment
• Seasonal unemployment

6.7 Effect of unemployment – will reduce productivity and income

 Social problems
 Loss of job skills
 Output produced is less than potential output
 Loss in government revenue

6.8 Measures to control unemployment by using:

i) Fiscal policies – to increase expenditure in the economy

• Decrease in taxes
• Increase in government expenditure

ii) Monetary policies – to increase money supply in the economy

• Open market operation – buy short term bond and government security
• Lowering the reserve requirement
• Reduce interest rate
• Lowering the discount rate/bank rate

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 Macroeconomic Problem

MULTIPLE CHOICE

1. The three main tools of monetary policy are

A. Tax rate changes, the discount rate, and open market operations
B. Tax rate changes, changes in government expenditures and open market operations.
C. The discount rate, the reserve ratio and open market operations
D. Changes in government expenditures, the reserve ratio and the discount rate.

2. When economists refer to “tight” monetary policy, they mean that Bank Negara Malaysia is
taking actions that will

A. Increase the demand for money

B. Decrease the demand for money
C. Contract the money supply
D. Expand the money supply

3. An example of a tight monetary policy is

A. an increase in the reserve requirement

B. the Bank Negara buying government securities in the open market
C. a decrease in the prime lending rate
D. a decrease in the discount rate

4. Which of the following is a fiscal instrument?

A. Interest rate
B. Government expenditure
C. Funding
D. Open market operation

5. Expansionary fiscal policy involves:

A. A decrease in government spending and /or an increase in taxes

B. Only an increase in taxes.
C. An increase in government spending and /or a decrease in taxes
D. Only a decrease in government spending

6. Inflation is:

A. A general yearly increase in the average level of prices

B. An increase in the purchasing power of the ringgit
C. A loss in disposable income due to increased government spending
D. The focus of microeconomics analysis

7. Inflation that causes an increase in the price level and a reduction in output is

A. Hyperinflation
B. Demand-pull inflation
C. Fully-anticipated inflation
D. Cost-push inflation
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 Macroeconomic Problem

8. In a simple demand-pull inflation, an increase in aggregate spending result in proportional

increases in

A. real output as long as the economy has not reached full employment
B. the price level as long as the economy has not reached full employment
C. the cost of real output level as long as the economy has not reached full employment
D. real output once the economy has reached full employment

9. Who is most likely to be hurt by inflation?

A. The Malaysia government

B. A business owner
C. Someone who borrowed money
D. A retiree on a fixed income

10. Who is more likely to gain benefit from inflation?

A. Creditors
B. Pensioners
C. Debtors
D. Insurance policy holders

11. The suitable monetary policy to overcome inflation is by

A. The purchase of bonds by the central bank

B. Reducing the interest rates on loans
C. Reducing the supply of money in the money market
D. Promoting hire purchase activities

12. In time of inflation, the proper fiscal policy should be

A. To reduce taxation and to reduce public expenditure

B. To increase taxes on income and wealth and to increase government expenditure
C. To increase taxes on income and wealth and to reduce public expenditure
D. To borrow more from abroad

13. Unemployment caused by a fall in demand for goods and services across the economy

A. Cyclical unemployment
B. Frictional unemployment
C. Structural unemployment
D. Seasonal unemployment

14. Unemployment caused when a person resigns from their job to star looking for a higher paying
job that better suits their skills

A. Frictional unemployment
B. Seasonal unemployment
C. Cyclical unemployment
D. Structural unemployment
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 Macroeconomic Problem

15. The portion of unemployment that is due to the short-run job/skill matching problems is called

A. Frictional unemployment
B. Natural unemployment
C. Structural unemployment
D. Cyclical unemployment

16. Assuming the total population is 200 million, the labour force is 100 million, and 92 million
workers are employed, the unemployment rate is

A. 4 percent
B. 6 percent
C. 8 percent
D. 10 percent

17. The type of unemployment that occurs during recessions is

A. Cyclical unemployment
B. Frictional unemployment
C. Seasonal unemployment
D. Structural unemployment

18. It is difficult for cyclically unemployed individuals to find jobs because

A. They have not looked long enough to find a job

B. The economy is in a recession
C. They do not meet the qualifications requires for the available jobs
D. They quit their last job and employers view them with suspicion

19. If the country is heading into a recession, the government might be able to counteract this by

A. Increasing the discount rate

B. Acting to decrease the money supply
C. Carrying out an expansionary fiscal policy
D. Forcing the government deficit to decrease

20. If the government want to reduce unemployment, government spending should be

A. decreased.
B. increased.
C. constant.
D. none of the above.

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 Macroeconomic Problem

STRUCTURED QUESTION

QUESTION 1

Year Consumer Price Index (CPI)

2015 90
2016 100
2017 110
2018 120
2019 130

a) Which year is the base year?

b) Calculate the inflation rate for year 2016 until 2018.

c) Based on your answer in (b), does the cost-of-living increase or decrease from year 2016 to
2018. Why?

QUESTION 2

Fill in the blanks with appropriate answers.

Number of people (million)

Items
2015 2016
Labour force 55
Employed 35
Unemployed 18 22
Not in labour force 29
Population 85
Unemployment rate

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 Macroeconomic Problem

QUESTION 3

Circle the correct answer. T represents TRUE and F represents FALSE.

Labor force is persons above the age of 16 and

older who are employed or are actively seeking T
employment. F
Structural unemployment occurs when people T
are in between jobs, or are entering or reentering
the labor force. F
Cyclical unemployment is caused by a decrease T
in aggregate demand due to a change in
business cycle. F
Demand pull inflation occurs when aggregate T
supply exceeds aggregate demand.
F
Cost push inflation is caused by an increase in T
the general price level associated with an
increase in the cost of production. F

Contractionary fiscal policy will overcome the

problem of unemployment.
T
F
Increase in money supply will reduce the
problem of inflation. T
F
Interest rate and discount rate are an example of
monetary tools use to overcome
T
macroeconomics problems. F

Inflation will benefit fixed income earners and T

retirees.
F

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