DIPLOMA IN BUSINESS ADMINISTRATION

SEPTEMBER 2018 ECON 202: MACROECONOMICS

TUTORIAL
CHAPTER 1 & 2
Answers
CHAPTER 1: INTRODUCTION TO MACROECONOMICS
1 B
2 A
3 D
4 D
5 C
6 A
7 D
8 D
9 A
10 A
11 Macroeconomics encompasses a variety of concepts and variables, but there
are three central topics for macroeconomic research. Macroeconomic theories
usually relate the phenomena of output, unemployment, and inflation. Outside
of macroeconomic theory, these topics are also important to all economic
agents including workers, consumers, and producers.
Output and income
National output is the total amount of everything a country produces in a given
period of time. Everything that is produced and sold generates an equal amount
of income. The total output of the economy is measured GDP per person. The
output and income are usually considered equivalent and the two terms are
often used interchangeably, output changes into income. Output can be
measured or it can be viewed from the production side and measured as the
total value of final goods and services or the sum of all value added in the
economy.
Macroeconomic output is usually measured by gross domestic product (GDP)
or one of the other national accounts. Economists interested in long-run
increases in output study economic growth. Advances in technology,
accumulation of machinery and other capital and better education and human
capital are all factors that lead to increased economic output over time.
However, output does not always increase consistently over time. Business
cycles can cause short-term drops in output called recessions. Economists look
for macroeconomic policies that prevent economies from slipping into
recessions and that lead to faster long-term growth.

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DIPLOMA IN BUSINESS ADMINISTRATION
SEPTEMBER 2018 ECON 202: MACROECONOMICS

Unemployment
The amount of unemployment in an economy is measured by the
unemployment rate, i.e. the percentage of workers without jobs in the labour
force. The unemployment rate in the labour force only includes workers actively
looking for jobs. People who are retired, pursuing education or discouraged
from seeking work by a lack of job prospects are excluded.
Unemployment can be generally broken down into several types that related to
different causes.
Classical unemployment theory suggests that unemployment occurs when
wages are too high for employers to be willing to hire more workers. Other more
modern economic theories suggest that increased wages actually decrease
unemployment by creating more consumer demand. According to these more
recent theories, unemployment results from reduced demand for the goods and
services produced through labour and suggest that only in markets where profit
margins are very low and in which the market will not bear a price increase of
product or service, will higher wages result in unemployment.
Consistent with classical unemployment theory, frictional unemployment occurs
when appropriate job vacancies exist for a worker but the length of time needed
to search for and find the job leads to a period of unemployment.
Structural unemployment covers a variety of possible causes of unemployment
including a mismatch between workers' skills and the skills required for open
jobs. Large amounts of structural unemployment commonly occurs when an
economy shifts to focus on new industries and workers find their previous set
of skills are no longer in demand. Structural unemployment is similar to frictional
unemployment as both reflect the problem of matching workers with job
vacancies but structural unemployment also covers the time needed to acquire
new skills in addition to the short-term search process.
While some types of unemployment may occur regardless of the condition of
the economy, cyclical unemployment occurs when growth stagnates.
Inflation and deflation
A general price increase across the entire economy is called inflation. When
prices decrease, there is deflation. Economists measure these changes in
prices with price indexes. Inflation can occur when an economy becomes
overheated and grows too quickly. Similarly, a declining economy can lead to
deflation.
Central bankers, who manage a country's money supply try to avoid changes
in price level by using monetary policy. Raising interest rates or reducing
the supply of money in an economy will reduce inflation. Inflation can lead
to increased uncertainty and other negative consequences. Deflation can
lower economic output. Central bankers try to stabilize prices to protect
economies from the negative consequences of price changes.

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DIPLOMA IN BUSINESS ADMINISTRATION
SEPTEMBER 2018 ECON 202: MACROECONOMICS

Changes in price level may be the result of several factors. The quantity theory
of money holds that changes in price level are directly related to changes in the
money supply. Most economists believe that this relationship explains long-run
changes in the price level. Short-run fluctuations may also be related to
monetary factors but changes in aggregate demand and aggregate supply can
also influence price level. For example, a decrease in demand due to a
recession can lead to lower price levels and deflation. A negative supply shock,
such as an oil crisis lowers aggregate supply and can cause inflation.
12 Economists will focus on achieving macroeconomic goals. The four major
economic goals are as follows:
(i) Full employment
One of the macroeconomic goals is achieving full employment of all
available factors of production, for example, labour, land, capital and
entrepreneurship. An economy should use all its available resources
more efficiently to attain maximum output. Therefore, the more the
resources employed, the higher the output of goods and services.
When there is unemployment, it means that an available resource is not
being used. This indicates inefficiency and a waste of resources. The
unemployment rate in the labour market shows a percentage of the
labour force being out of employment and seeking employment.
Unemployment has several consequences, such as economic loss to
society and loss of self-respect.
Full employment does not mean that 100% of the labour force is
employed. This is because there are always some people who are
voluntarily unemployed as a result of being unsatisfied with their current
job and resigning to find another job. Full employment means that
unemployment rate is equal to all types of unemployment except cyclical
unemployment.
(ii) Price stability
Maintaining price stability or controlling inflation is another
macroeconomic goal. The objective of the nation is to keep its inflation
rate as low as possible. Inflation occurs when there is an increase in the
overall price level. This does not mean that the price of every product
and service will increase, but inflation is based on average prices. If the
inflation rate is 6%, it does not mean that all prices increase by 6%.
Inflation can reduce the purchasing power of consumers. The quantity
of goods and services purchased will be less if inflation is high.
Inflation can also have several consequences. It can lead to income not
rising as fast as prices, thereby penalizing certain groups of people,
namely pensioners and fixed income earners. It is therefore in the
interest of every nation to keep its inflation rate as low as possible.

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DIPLOMA IN BUSINESS ADMINISTRATION
SEPTEMBER 2018 ECON 202: MACROECONOMICS

(iii) Economic growth

To achieve economic growth, which is another macroeconomic goal.
The economy must be operating at maximum capacity. In other words,
economic growth refers to an increase in the full production output
level of a nation over time.
Economic growth can only be realized over the years. However, the
economic growth of a nation does not move constantly, but will
experience short-term ups and downs. This is called the business
cycle. In a business cycle, economic growth is measured by the
aggregate output and the unemployment rate. There are four phases in
a business cycle: peak, recession, trough and recovery.
Economic growth is also measured by evaluating the full production
output per capita. If the growth rate of output is greater than the growth
rate of the population, it shows an increase in the amount of goods and
services produced per person. Therefore, on average, people would be
better off.
(iv) Equitable distribution of income
Most nations try to narrow the gap between the higher income and the
lower income groups. This is to ensure that all people are equal in terms
of the standard of living. Disparities in income will create social friction
and bring about many problems.
Taxation is one method of achieving an equitable distribution of income.
When taxes are imposed, the higher income groups pay a higher tax to
the government. An expenditure policy narrows the gaps between the
two income groups. Through this policy, income is more evenly
distributed, with the government providing subsidies, making transfer
payments and providing education scholarships for the lower income
group. Through these methods, the macroeconomic goal of equitable
distribution of income can be achieved.
13 Keynesian model
14 Peak, recession, trough and recovery
15 i. Natural and human resources
ii. Technology
iii. Capital stock
iv. Economic choices made by citizens
v. macroeconomic policies of the government

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DIPLOMA IN BUSINESS ADMINISTRATION
SEPTEMBER 2018 ECON 202: MACROECONOMICS

CHAPTER 2: THE GOODS MARKET

1 B
2 D
3 D
4 D
5 C
6 A
7 B
8 B
9 B
10 Consumption refers to the purchase of goods and services by individuals or
households. Consumption function refers to the relationship between
consumption level and income level. The standard form of a linear equation is
Y = a + bx, where a is the intercept (the point at which the function cuts the
vertical axis) and b is the positive constant slope of the function.
The general equation for a linear consumption function can be written as:
C = a + bYd
Where, C = consumption expenditure
a = autonomous consumption (autonomous consumption does
not depend on the income level)
b = marginal propensity to consume (MPC)
Yd = disposable income
11
Country X Country Y

Y = 150 + 0.75( Y – 60 ) + 50 + 75 Y = 150 + 0.75( Y – 0.2Y ) + 200 +

= 275 + 0.75Y – 45 150
0.25Y = 230 = 500 + 0.75(0.8Y)
Y = RM920 billion = 500 + 0.6Y
Y = RM1 250 billion

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DIPLOMA IN BUSINESS ADMINISTRATION
SEPTEMBER 2018 ECON 202: MACROECONOMICS

12 (a)
Y T Yd C S I G C+I+G
100 100 0 50 -50 25 100 175
200 100 100 125 -25 25 100 250
300 100 200 200 0 25 100 325
400 100 300 275 25 25 100 400
500 100 400 350 50 25 100 475
600 100 500 425 75 25 100 550
700 100 600 500 100 25 100 625
800 100 700 575 125 25 100 700

(b) C = 50 + 0.75Yd
S = -50 + 0.25Yd

(c) Y=C+I+G
400 = 275 + 25 + 100
Y = RM400 million

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