Final Exam

Question 1

what is economics?

Answer 1

the study of how scare resources are used to produce goods & service to satisfy unlimited human wants

Question 2

what are the limited resources/factors of production? (4)

Answer 2

1- land: natural resources of nature
2- labour: human resources, mental or physical ability
3- capital: man-made aids (machinery)
4- entrepreneur: individual that combines 3 factors or production, takes risk

Question 3

what are the 3 basic economic problems + brief explanation

Answer 3

1- what & how much to produce?
> opportunity cost due to scarcity of resources
2- how to produce?
> labour intensive or capital intensive
3- for whom to produce?
> based on income distribution (higher income grp get better quality goods)

Question 4

what is opportunity cost?

Answer 4

the next best alternative sacrificed for a chosen alternative

Question 5

what is a change in demand?

Answer 5

due to other factors and not a change in price of the good itself

Question 6

what are the factors that affect the demand of a good?

Answer 6

1- changes in the price of related goods
a) substitute goods
> increased price of good Y will result in an increased demand of good X
b) complimentary goods
> increased price of good Y will result in a decreased demand of good X

2- income
(a) normal goods
> increased income, increased demand
(b) inferior goods
> increased income, decreased demand

3- consumer’s taste & preference
> festive seasons

4- advertising

5- expected future prices
> expected price to increase, demand now decrease

6- gov policy
(a) subsidy
> subsidise more, demand increase
(b) tax
> higher tax, demand decrease

Question 7

what is a change in supply?

Answer 7

the change of supply is due to other factors and not the change in price of the good itself

Question 8

what are the factors that affect supply?

Answer 8

1- prices of related goods
(a) competitive supply
> when price of a good increases, the amount supplied of another good decreases
eg: price of chicken increases, supply of chicken increases, fall in supply of eggs
(b) complements in supply
> the supply of one good will increase the supply of another
eg: beef & leather
(c) substitute in supply
> the price of one good increases, the supply of the other good decreases

2- cost of production
> cost increase, supply decrease

3- climate condition
eg: monsoon season, supply of fish falls

4- technology
> advanced tech, increased supply

5- gov policies
> tax increase, supply fall
> subsidy increase, supply increase

6- no. of producers
> a lot of producers, increase supply

Question 9

what is demand?

Answer 9

the desire to buy goods & the ability to pay

Question 10

what is supply?

Answer 10

the quantity of a good or service offered

Question 11

what is market equilibrium?

Answer 11

when the quantity demanded equal quantity supplied

Question 12

what is maximum price policy?

Answer 12

• aka ceiling price
• gov set max price below the equilibrium price
• goal: protect consumers
• imposed on essential goods (sugar, cooking oil & rice)
• effect: increase of demand, shortage occur (demand > supply)
• may hv black market, not all buyers able to purchase goods

Question 13

what is minimum price policy?

Answer 13

• aka floor price
• gov set price below the equilibrium price
• goal: protect producers when prices are too low, generate guarantee return (income)
• imposed on agricultural products
• gov can purchase surplus of goods for future use
• effect:
  > consumers pay more
  > surplus purchased using taxpayer’s money (less money for other projects)
  > may lead to overproduction = wastage of resources

Question 14

what is GDP + calculation

Answer 14

• gross domestic product
• final goods produced within the country

1- income approach
rent + wages + interest + profit
> transfer payment NOT included

2- expenditure approach
consumption + investment + gov expenditure + ( export - import )

Question 15

what is GNP + calculation?

Answer 15

• gross national product
• final goods & services produced by the citizens regardless of where they are (ownership)

GNP= GDP + (factor income from abroad - factor income paid abroad)

Question 16

what is NNP? what is NDP?

Answer 16

• net national product = national income

NNP= GNP - depreciation
NDP= GDP - depreciation

Question 17

calculation for GDP per capita?

Answer 17

GDP/total population
for average income

Question 18

what are the factors that influence consumption? (4)

Answer 18

1- level of income
> income increase, consumption increase (+ve relationship)

2- cost & availability of credit (loan)
> low interest rate, increase consumption
> longer pay back period, increase consumption

3- consumer expectation
(a) inflation
> expect price of good rise, consumption now increase
(b) income level
> expect income rise, consumption now increase
(c) employment
> employment rise, consumption rise

4- wealth & savings
> more wealth & savings, higher level of consumption

Question 19

what is inflation + calculation

Answer 19

a continuous increase in the general price level of goods

inflation rate:
current yr CPI - prev yr CPI/prev yr CPI x 100%

Question 20

what is CPI?

Answer 20

• consumer price index
• measures changes in general price level

Question 21

what causes inflation? (3)

Answer 21

1- demand-pull inflation
- due to rising AD
- near full employment
- increase household income, foreign investment & lower interest rate
- increase money supply

2- cost-push inflation
- rise of cost of production
- pass the cost to consumers, increased prices
- decreased production

3- imported inflation
- import goods from countries experiencing inflation
- goods purchased at higher price
- goods sold at higher price in local market

Question 22

under monetary policy, what are the tools used to control inflation?

Answer 22

monetary policy- contractionary policy, aimed to reduce money supply

1- bank rate
> central bank (Bank Negara Malaysia) increase bank rate
> influence commercial bank, set higher interest rate
> borrowing more costly for consumers, demand for loans will fall
> fall in consumption, fall in investment
> reduced AD, reduced demand-pull inflation, fall of prices of goods

2- open market operations
> central bank sell more Treasury Bills
> bought by commercial banks & individuals
> deposit in commercial banks are reduced
> credit creation in more difficult (careful)
> reduce supply of loans
> fall in consumption, fall in investment
> reduces inflation

3- cash & liquidity ratio
*total liquid assets/total deposits**

> central bank will increase the ratio
commercial banks hv to put more $ in reserve requirement
credit creation is more difficult
supply of loan reduced
fall in consumption, fall in investment
reduce AD

Question 23

what is labour force + calculation?

Answer 23

• ppl who are willing to work

number of employed + number of unemployed

Question 24

what is unemployed + calculation

Answer 24

• willing and able to work, but fail to obtain a job

unemployment rate:
number of unemployed/labour force x 100%

Question 25

what are the causes of unemployment? (5)

Answer 25

1- *frictional* unemployment - inevitable, no need gov intervention - normal **turnover** labour - ppl resign and are **searching** for a job - job seekers or fresh university graduates 2- *structural* unemployment two reasons: (a) change in *structure* of economy > decline of traditional manufacturing industries > unemployed for **long periods* > unable find job for their **particular skill** (b) change in *pattern* of *demand* of good > change in consumer **preference** > goods out of fashion 3- *technological* unemployment > change in **method of production** > machines & robots **replace** jobs done by humans 4- *cyclical* unemployment > during **recession** > lack of AD > firms produce **less**, layoff workers 5- *seasonal* unemployment > out of work during **certain periods or seasons** eg: fishermen, actors, tour guide

Question 26

under monetary policy, what are the 3 tools used to solve unemployment?

Answer 26

- **expansionary** monetary policy, to increase **money supply** in market 1- interest rate > reduce interest rate > reduce **cost of borrowing** for consumers > **supply** of loans increase > increase consumption, increase investment > firms **produce** more, **hire** more employees > **GDP** increase, reduce unemployment 2- open market operations > central bank **buy back** Treasury Bills from commercial banks/individuals > **deposit** in commercial banks increase > **credit creation** is easier > **supply** of loan increased > consumption & investment increase > AD increase, unemployment fall 3- cash & liquidity ratio > central bank **reduce** the ratio > **credit creation** is easier (more money to lend out) > **supply** of loan increased > consumption & investment increase > AD increase, unemployment fall

Question 27

what is money?

Answer 27

- antg that is accepted as a **medium of exchange**

Question 28

what are the types of money?

Answer 28

1- legal tender > notes & coins **issued** by central bank > must be accepted 2- commodity money > **precious metals & cowrie shells** > value comes from the **commodity** it is made out of eg: gold, silver,rice, alcohol 3- fiat money > aka **representative** money > is money **issued** by central bank, but has no **intrinsic value** > **actual value** is zero > only has value by **government order**