Using the aggregate demand and aggregate supply model, explain the effects of the following on price and real income in Malaysia.(a)  Consumers are worried with the country’s economic progress.(b)  Firms have begun to use more high-tech machineries for production.(c)  The Malaysian government has decided to spend on a major revamp of the public transportation system.(d) Malaysian higher education system has produced highly skilled employees.

Question
Asked Oct 16, 2019

Using the aggregate demand and aggregate supply model, explain the effects of the following on price and real income in Malaysia.

(a)  Consumers are worried with the country’s economic progress.

(b)  Firms have begun to use more high-tech machineries for production.

(c)  The Malaysian government has decided to spend on a major revamp of the public transportation system.

(d) Malaysian higher education system has produced highly skilled employees.

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Step 1

(a) The statement “Consumers are worried with the country’s economic progress” is indicating that, people are prefers to consume less in the present and save more for the future. This attitude reduces the aggregate demand for the goods and services. Thus, the aggregate demand curve shifts to leftward. The leftward shift of aggregate demand curve leads to fall in price and this fall in price causes to fall in real GDP. These effects are shown in a figure.

LRAS
Price
SRAS1
P1
E 1
E 2
P2
AD1
AD2
Y2 Y
Real GDP
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Image Transcriptionclose

LRAS Price SRAS1 P1 E 1 E 2 P2 AD1 AD2 Y2 Y Real GDP

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Step 2

(b) The statement “Firms have begun to use more high-tech machineries for production” is indicating that, firm’s productivity is increasing by using the same amount of resources. This is leads to increase in aggregate supply of goods in the market, or, goods that are available for consumption in the market are increasing. Increasing aggregate supply leads to rightward shifts in aggregate supply curve. Rightward shift of supply curve reduces the price of goods in the market and increases the real GDP. These effects are shown in a figure.

AS
Price
AS1
PI
E2
P2
AD
Yi Y2
Real GDP
help_outline

Image Transcriptionclose

AS Price AS1 PI E2 P2 AD Yi Y2 Real GDP

fullscreen
Step 3

(c) The statement “The Malaysian government has decided to spend on a major revamp of the public transportation system” is indicating that, government spending is increasing. Increase in government spending is results, an incr...

LRAS
SRAS1
Price
E 2
P2
E1
P1
AD2
AD1
Real GDP
Y Y2
help_outline

Image Transcriptionclose

LRAS SRAS1 Price E 2 P2 E1 P1 AD2 AD1 Real GDP Y Y2

fullscreen

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