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 18, 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

check_circleExpert Solution
Step 1

Each of the given figure (1, 2, and 3), point ‘A’ shows the initial equilibrium where the aggregate demand (AD) and short-run aggregate supply (SRAS) curves intersect. 

Step 2

(a) If consumers are worried with Malesia’s economic progress, they will reduce consumption to meet the future uncertainty. This action would reduce aggregate demand and leads to a leftward shift in the aggregate demand curve (from AD0 to AD1). As a result, both the price level and real income would fall (from P0 to P1 and Y0 to Y1 respectively). This can be explained by using the aggregate demand and aggregate supply model as follows.

SRAS
Price
A
PO
B
P1
AD
AD1
YO
Y1
Real Income
Figure 1
20
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SRAS Price A PO B P1 AD AD1 YO Y1 Real Income Figure 1 20

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Step 3

(b) The usage of more high-tech machineries of production will increase the profitability of firm, thus they will increase production. An increase in production will shift the short-run agg...

SRAS
SRAS1
Price
A
P0
B
P1
AD
Y1
YO
Real Income
Figure 2
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SRAS SRAS1 Price A P0 B P1 AD Y1 YO Real Income Figure 2

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