FKLT/06-00

Assignment Cover be sure to keep a copy of all work submitted To be completed by student PLEASE PRINT CLEARLY

Name(s) AHMAD FAIDHUL IRFAN BIN AHMAD MUSTAFFA KAMAL ID Number(s) 2011567561 / ITM 120118830 Lecturer MISS NURSHUHAIDA BT ABDUL RAZAK Lab group / Tutorial group / Tutor (if applicable)

Course and Course Code Submission Date: 14 AUGUST 2013 MACROECONOMICS ( ECO 211 ) Assignment No. / Title Extension & Late submission: 1 Allowed / Disallowed Assignment type % of Assignment Mark Returning Date: INDIVIDUAL Penalties: 1. 10% of the original mark will be deducted for every one week period after the submission date 2. No work will be accepted after two weeks of the deadline 3. If you were unable to submit the coursework on time due to extenuating circumstances you may be eligible for an extension 4. Extension will not exceed one week

Declaration: I/we the undersigned confirm that I/we have read and agree to abide by these regulations on plagiarism and cheating. I/we confirm that this piece of work is my/our own. I/we consent to appropriate storage of our work for checking to ensure that there is no plagiarism/ academic cheating.

Signature(s): -------------------------------------- -----Full Name ( AHMAD FAIDHUL IRFAN BIN AHMAD MUSTAFFA KAMAL )

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PART A
Question 1a The table below shows consumption and income in Putraland. Year
2007 2008 2009 2010 2011 2012 Consumption (RM) 1700 2100 2500 2900 3300 3700 Disposable Income (RM) 2000 2500 3000 3500 4000 4000

i)

State the consumption and saving function of Putraland. Consumption function, MPC = C -C -Y = 2100 1700 = 0.8 2500 2000

C = a + byd 1700 = a + (0.8)(2000) 1700 = a + 1600 a = 1700 1600 a = 100 Consumption function, C = 100 + 0.8y Saving function, S = -a + byd MPC + MPS = 1 0.8 + MPS = 1 MPS = 1 0.8 MPS = 0.2 Saving function, S = -100 + 0.2y

ii)

Calculate breakeven income of Putraland. Breakeven income, Y=C Y = 100 + 0.8y Y 0,8y = 100 0.2y = 100 y = 100/0.2 y = 500 S=0 -100 + 0.2y = 0 0.2y = 100 y = 100/0.2 y = 500

Question 1b You are given the following information. Consumption ( C ) = 400 + 0.8 Yd Government expenditure ( G ) Investment Taxation i)

= 200 = 30 = 10

Calculate the national income equilibrium C = 400 + 0.8 ( y t ) C = 400 + 0.8 ( y 10 ) C = 400 + 0.8y 8 C = 392 + 0.8y Y=C+G+I Y = 392 + 0.8y + 200 + 30 Y = 622 + 0.8y Y 0.8y = 622 0.2y = 622 y = 622/0.2 y = 3110

ii)

Calculate the government expenditure multiplier and the tax multiplier kg = 1 1b kg = 5 times kt = -b 1b kt = -4 times = 1 1- 0.8 = 1 0.2

= -0.8 1 0.8

= -0.8 0.2

iii)

If full employment income is RM 3000 million, what problem is this country facing? Show this situation in a well labelled diagram. Ye = RM 3110 Million, Yf = RM 3000 Million The problem that the country facing is INFLATIONARY GAP or INFLATION AD y ADe inflationary gap e ADf

GNP gap y yf 3000 ye 3110

Question 2 The following table is money supply data in year 2012. Item
Private sectors deposit with finance companies Paper money Demand deposits Negotiable instruments of deposits (NIDs) placed with companies and merchant banks Bank Negara Certificate Fixed and saving deposits in other commercial banks Negotiable instruments of deposits (NIDs) placed with commercial banks Fiat money RM million 21720 15000 90300 15500 110230 63400 11800 20155

a) Calculate i) M1 M1 = fiat money + demand deposit = 20155 + 90300 = RM 110455 million ii) M2 M2 = M1 + BNM Certificate + fixed & saving deposits in other commercial bank + NIDs placed with commercial banks = 110455 + 110230 + 63400 + 11800 = RM 295855 million M3 M3 = M2 + NIDs placed with commercial banks = 295855 + 15500 = RM 311385 million Near quasi money Near quasi money / near money = M2 M1 = 295855 110300 = RM 185430 million

iii)

iv)

b) Define broad quasi money Broad quasi money is all the near money that need to be converted into cash, before we can use to make payment or settle the debts.

c) Explain TWO(2) functions of money First function of money is a medium of exchange. Money is mostly demand for transaction purpose. Without money, exchanging of goods and services can only take place through the barter system, which bear the problem of double coincidence of wants. Money is liquid form of wealth. Second function of money is as a store of value. Since money is not suffer from any physical deterioration, it can be stored and can be turned into other forms of wealth quickly. We can use money to buy buildings, lands or other type of wealths.

Question 3 Given the following data of a country, for the year ended December 2010. ITEMS
Manufacturing Corporate profit Forestry Fishing Agriculture Factor income from abroad Factor payment to abroad Wages and salaries Physical increase in stock Construction Banking and insurance services Capital consumption Other services Tax on expenditure Subsidies

RM million
540 1000 360 240 820 900 800 1600 600 800 540 400 140 480 500

Calculate : a) Gross Domestic Product (GDP) at market price GDPmp = Manufacturing + Forestry + Fishing + Agriculture + Physical increase in stock + Construction + Banking and insurance services + Other services = 540 + 360 + 240 + 820 + 600 + 800 + 540 + 140 = RM 4040 million

b) GDP at factor cost GDPfc = GDPmp + Subsidies - Tax on expenditure = 4040 + 500 380 = RM 4060 million

c) GNP at factor cost GNPfc = GDPfc + Factor income from abroad - Factor payment to abroad = 3060 + 900 800 = RM 4160 million

d) Net National Product (NNP) at factor cost NNPfc = GNPfc Capital consumption = 4160 400 = RM 3760 million

e) List FOUR(4) problems calculating national income 1) 2) 3) 4) Problem of double-counting Lack of data Unpaid activities Allowance for depreciation

f) List TWO(2) uses of calculating national income 1) To measure the economic growth 2) To assist the government in the planning

PART B
Question 1a Based on the following information, answer the question below (all figures are in RM million). Consumption = 100 + 0.75Yd Investment = 50 Government expenditure = 100 Tax = 0.1Y i) Calculate the national income equilibrium. C = 100 + 0.75Yd C = 100 + 0.75( y t ) C = 100 + 0.75 ( y 0.1y ) C = 100 + 0.75 ( 0.9y ) C = 100 + 0.675y Y=C+I+G Y = 100 + 0.675y + 50 + 100 Y = 250 + 0.675y Y 0.675y = 250 0.325y = 250 y = 250/0.325 y = RM 769.23 million

ii)

Using AD = AS approach, draw a diagram to show the equilibrium income. AD y e c = 250 + 0.675y

250

Income (y) Ye = 769.23

iii)

If full employment income level is RM 900 million, what problem is the country facing? Using the multiplier concept, calculate how much should the government increase its expenditure to solve the problem?

Ye = RM 769.23 million, if Ye = RM 900 million Since Ye is less than the value of Yf, The problem that the country facing is recession ( recession gap ) kg = 1 1 b + bt kg = 1 1 0.75 + (0.75)(0.1)

kg = 3.08 times Ynew = Yold + y 900 = 769.23 + y y = 900 769.23 = 130.77 y = kg x g 130.77 = 3.08 x

g = 130.77/3.08 = 42.46

Government should increase its expenditure by RM 42.46 million in order to solve the problem.

Question 1b The table below shows the money supply for country Z in 2006. Items Paper money Bank Negara Certificates Negotiable certificates of deposits commercial banks Fixed and saving deposits in other financial institutions Fixed and saving deposits in other commercial banks Current deposits in commercial banks Fiat money a) Calculate i) M1 M1 = Fiat money + Current deposits in commercial banks M1 = 7555 + 85000 M1 = RM 92555 million ii) M2 M2 = M1 + Bank Negara Certificates + Negotiable certificates of deposits commercial banks + Fixed and saving deposits in other commercial banks M2 = 92555 + 12000 + 7500 + 10000 M2 = RM 122055 million iii) M3 M3 = M2 + Fixed and saving deposits in other financial institutions M3 = 122055 + 6000 M3 = RM 128055 million iv) Near quasi money Near quasi money = M2 M1 = 122055 92555 = RM 29500 million

RM million 5200 12000 7500 6000 10000 85000 7555

Question 2 The table below shows items from the national income account of a country for the year 2011.
ITEMS Mining and Quarrying Banking, insurance and other services Manufacturing Subsidies Wholesale, retail trade, hotel and restaurant Agriculture, forestry and fishing Transport, storage and communication Construction Electricity, gas and water Taxes on expenditure Factor income paid abroad Factor income received from abroad Capital consumption Government consumption RM MILLION 7200 13800 23200 790 14400 15600 9800 2200 1100 14200 10000 18250 20200 10000

a) Calculate : i) Gross Domestic Product (GDP) at market price GDPmp = Mining and Quarrying + Banking, insurance and other services + Manufacturing + Wholesale, retail trade, hotel and restaurant + Agriculture, forestry and fishing + Transport, storage and communication + Construction + Electricity, gas and water = 7200 + 13800 + 23200 + 14400 + 15600 + 9800 + 2200 + 1100 = RM 87300 million ii) Gross National Product (GNP) at market price GNPmp = GDPmp + Factor income received from abroad - Factor income paid abroad = 87300 + 18250 10000 = RM 95550 million

iii)

Gross National Product (GNP) at factor cost GNPfc = GDPmp + Subsidies - Taxes on expenditure = 87300 + 790 14200 = RM 82140 million

iv)

National Income NI = GNPfc Capital consumption = 82140 20200 = RM 61940 million

b) Give TWO(2) example of transfer payment 1) Pension 2) Scholarship