Name Matric No.

Course

: Mardiah Bt Shaharum : G1110908 : IFS (IBF 6110)

Task for Week 1;

Case for class presentation and discussion:

Explain how the economic system of a particular jurisdiction works?

The current economic situation shows price level of most goods (consumers and industrial goods) is increasing fairly quickly, Minister of Finance announced in the recent budget speech, in the parliament that the government is introducing a number of measures to fight against the steady growth in the general price level (inflation).

Questions:

1) Based on the secular economic concept what are the likely measures that will be introduced by the Minister of Finance? Explain how each measure is going to work? 2) Will the measure adversely affect the economic growth?

How the Economic System Works?

Every economic system consists of consumers and producers. Individuals, firms and governments are considered as consumers. There are three basic economic questions that determine how the particular economic system works. The questions are; i) ii) iii) What to produce? How to produce? For whom to produce?

All of these questions are answered due to the type of economic system in the particular country. There are three main types of economic systems in the world, which are capitalist economy system, socialist economy system and mixed economy system.

In capitalist economy system, producers will produce goods and services due to the markets demand and try to maximize their profit. In the other word, consumers determine what to produce. Consumers will pay producers according to what have they buy from the market. At the same time, producers acquire resources from consumers including land, labor, capital and management to produce goods and services. Between these two operations among consumers and producers, they will use financial distribution system like bank to make payment. As opposed to socialist economy system, governments determine all of the economic activities. Everyone is given the same standard of living and they have no chance to improve it although they work harder than the others. How to produce is depend to the producers either to use labor intensive or capital intensive (technology-based). Moreover, for whom to produce is depend on consumers to buy what they need and their willingness to pay the price of goods and services.

Measures to Combat Inflation

Inflation is a situation where price level is rising and money is losing its value. It can result from either increase in aggregate demand or decrease in aggregate supply. Basically, there are two types of inflation, which are demandpull inflation and cost-push inflation. Demand-pull inflation is results from an initial increase in aggregate demand, while cost-push inflation is an initial increase in costs.

There are several ways to fight against inflation based on the secular economic concept. In order to do that, government will use both of monetary and fiscal policies. Monetary policy is the process which the monetary authority in a particular country controls the supply of money and interest rate. Increase in interest rate will

reduce borrowing activities and encourage saving as people need to pay back more when they borrow money from the financial intermediaries. Otherwise, they will get more interest from their deposits in banking institutions. As interest rate is increased, companies will also reduce their loan for investment. Hence, the production of goods and services will be decreased. Besides, people will reduce to buy fixed asset, too as they have to settle down their payment in short period and in the higher amount. Consequently, inflation can be cured as a result to decrease in aggregate demand.

Besides that, government will use fiscal policy to prevent inflation, which is the use of government spending and taxation as revenue. In order to reduce aggregate demand, government will cut their spending on public and raise taxes. Thus, inflation can be cured.

Effect to the Economic Growth

Economic growth refers to increases in real per capita income (GDP). In order to stabilize economic system, the measures may also give an adverse impact to the economic growth.

For instance, as the costs of borrowing rise, investors will seek for the more profitable investments like real estate and so on. Hence, investment in the productive capacity of the economy will reduce and it will give negative impact to the economic growth.