Since 1970, Malaysia has transformed itself from natural stuffs manufacturer into lifting multi-sector economic system. Under present Prime Minister, Malaysia is seeking to make high-income position and to increase value-added production series by pulling investings in Islamic finance, engineering fabrication, biotechnology, and services.

The authorities is seeking to heighten local demand and lessen economic system ‘s trust on exports since exports remain an economic system major enterprise. As oil and gas exporter, Malaysia has gained net income from higher universe force monetary values, even though authorities subsidies is forced to cut down due to the turning domestic gasolene and Diesel gas cost, assorted with distraught authorities fundss. The authorities is besides taking to decrease its trust on province oil manufacturer PETRONAS as oil and gas section contributes above 40 % of authorities income.

The cardinal bank retains good foreign trade shops, and well-developed regulative system has restricted Malaysia ‘s revelation to endanger fiscal mechanism and planetary fiscal crisis. On the other manus, Malaysia could be at hazard to fall in merchandise monetary values or wide decelerate in world-wide economic activity because exports are Gross Domestic Product ( GDP ) chief component. Prime Minister has lift up possible accommodations to the unusual economic and societal favourites with the intent of attract increased investing ; nevertheless he has met major struggle, peculiarly from Malay patriots and other vested involvements.

However, during planetary fiscal crisis in twelvemonth 2008-2009, although Malayan fiscal system was protected from the direct effects of fiscal contact due to forbid of new derived functions into the state, the planetary fiscal crisis has transmit uncertainness on the Government ‘s programs to achieve vision 2020 because of prostration in exports and lag in foreign direct investing ( FDI ) .

Theoretical Background

Aggregate demand ( AD ) is aggregative measure demanded for goods and services in economic system at given general monetary value degree. It is symbolized by aggregative demand curve, which illustrates the negative relationship consequence between monetary value degree and entire end product presuming no fluctuation in authorities disbursement, net revenue enhancements or pecuniary policy variable. Aggregate demand curve is downward inclining because of wealth consequence, involvement consequence and exchange rate consequence.

At each point along aggregative demand curve, the entire measure demanded is precisely equal to planned sum outgo, which is the combination of ingestion, investing and authorities disbursement. Each point on aggregative demand curve bases for certain degree of aggregative outgo that is reliable with equilibrium in goods and money market at given monetary value.

When the aggregative demand curve is moved along, the alteration of monetary value degree is presumed to do equilibrium GDP alteration but other determiners of equilibrium GDP remain changeless. When other determiners except monetary value degree lead the equilibrium GDP alteration, aggregative demand curve will switch itself. The other determiners of equilibrium GDP are ingestion disbursals, investing disbursement, authorities outgo, revenue enhancements, net export and money supply.

Aggregate supply ( AS ) is entire goods and services supplied that are produced in economic system at peculiar overall monetary value degree. It is corresponded to aggregate supply curve or ‘price/output response ” curve, which demonstrates positive relationship consequence between entire end product sum supplied and overall monetary value degree. The curve besides draws out the monetary value and end product picks of all markets and houses in economic system under given set of fortunes.

In short tally aggregate supply, the thought of fixed capacity plays function in macroeconomics. At low end product point in economic system, there is possible to be excess capacity in economic system. An addition in aggregative demand is possible to outcome in addition in sum produced with somewhat or no rise in overall monetary value. Thus, aggregative supply curve is likely to be level at low sum end product degree. The economic system possibly works below capableness if there is cyclical unemployment even if houses are non keeping surplus labour and capital. The short-term sum supply curve is upward sloping, because the monetary value of a few inputs are supposed to be decided under auction-like state of affairss, caused by markup pricing and/or presumed informational abnormalities.

In long tally sum supply, houses ‘ reaction to an addition in aggregative demand varies from chiefly increasing end product to chiefly increasing monetary values as unemployment rate falls, rewards and cost of inputs will increase. When economic system is bring forthing at its maximal capacity, aggregate supply curve becomes perpendicular.

There must be clip hold between alteration in input monetary value and alteration in end product monetary value for aggregative supply curve to incline upward. If input monetary values altered immediately to end product monetary values, the aggregative supply curve would be perpendicular. Engage rates may increase at similar rate as overall monetary value if monetary value degree additions in to the full foreseen.

The grounds of the displacements of short-term aggregative supply curve are cost of production, outlook on future monetary value degree, economic growing, public policy and weather status. Meanwhile, the causes of displacements of long-term aggregative supply curve are alteration in labour, capital, natural resources and engineering.

Equilibrium monetary value degree is the monetary value degree at which the sum demand and aggregative supply curves meet. Equilibrium monetary value degree matches up with equilibrium in the goods & A ; money markets and lays down price/output determinations on portion of all houses in economic system AD/AS docket is applied to measure the effects of pecuniary & A ; financial policy on the economic system. Potential GDP is aggregative end product degree that can be continued in the long tally without rising prices. Economists consider costs cover behind monetary value degree alterations in the short tally ; finally travel with the overall monetary value degree in long tally. If the monetary value degree additions at a fixed rate, rising prices may be to the full foreseen & A ; built into labour contracts.

Discuss and statement

Aggregate Supply is the entire supply of all goods and services in an economy.Normally, the aggregative supply curve is draw like perpendicular line, besides name as classical range.But, in world, this Aggregate supply are divided into 3 scope, which is Keynesian scope, intermediate scope and besides classical scope.

Keynesian scope occur in the short tally and demo a horizontal section on of the aggreagate supply curve ( bluish line ) , which represent the economic system is under the recession condition.Base on tabular array below, the monetary value degree is fixed irrespective how many the end product had been produce by the country.When AD displacement rightward from AD1 to AD2, the entire end product has increase but the monetary value degree remain the same.This is due to the substaintial idle production capacity such as unemployed worker viing for available occupations can set to work.

The intermediate scope, as show in the pink line, is the lifting of aggragate supply curve when the economic system is nearing full employment output.When the AD displacement rightward from AD3 to AD4, the end product and besides monetary value degree addition.This show that they have the positive relationship between monetary value degree and existent GDP.When the monetary value degree addition, this had cause the rising prices occur.There are 3 factor cause this rising prices occur, the first 1 is bottleneck occur because the house no to the full utilise the resources.Example, if the steel industry no to the full supply to the steel house.Bottleneck cause steel house no adequate natural stuff to bring forth their merchandise and the cost of steel become higher, so they will besides increase the monetary value of thier merchandise, so rising prices occur.Moreover, when the company are gaining higher net income, their worker will be given to inquire for higher wages.The pay demand to increase is barely to reject because company fear the worker will discontinue or strike.Beside, the company besides can go through the cost on to consumer side easy because in this phase, the unemployement rate is lower, all people got thier occupation and they are expect higher monetary value of goods as they feel that will be more quality.Lastly is that sometime the house still utilizing the less produtivity worker or outdate machinery.This will do the cost of production addition and go higher merchandise monetary value.

Last the classical scope is occur merely in Long run supply swerve where the curve is perpendicular form, which show that the existent GDP remain changeless at full employment end product at point Yn, irrespective how many the monetary value degree had addition or decrease.When the AD displacement rightward from AD4 to AD5, the end product remain changeless, but it will do the monetary value addition, as a consequency economic system suffer rising prices.

The consequence of addition in Aggregate demand

AD1

AD2

AD3

AD4

AD5

AD6

YN

Aggregate_supply_svg.png

Now we consider the aggregative demand curve is stationary and the factor that influence the sum supply curve to shift.This factor are call non-price-level determiners.

What happen aggreagte supply curve in Malaysia late?

During the twelvemonth 2008, the oil monetary value in Malaysia all of a sudden increase eager beaver to US $ 147.27, comparison to the twelvemonth 2002 which the oil monetary value is simply US $ 20 ( Hour, 2009 ) . This issues was cause many family and besides house suffer a batch.As we know that the alterations of aggregative demand is base on alterations in entire demand for all concluding goods and services.In the statistics of consumer monetary value index ( CPI ) had found that every cunsumer use 68 % from their income for devouring nutrient, non-alcholic drinks, lodging, public-service corporation, gas, transit and besides fuel.After the fuel hiking in June 2008, the CPI immediate rose to a 27-year high of 7.7 % alternatively of 3.8 % in may,2008, which had addition 3.9 % within 1 month.Increase in input monetary value had cause the monetary value degree of economic system addition, the family purchase power will drop because their existent income had decrease.For illustration, before addition in oil monetary value, one home base of nasi lemak is cost RM2.00.but after increase the input monetary value, the marketer demand to bear higher cost to transport the same measure of nasi lemak, so they will reassign the cost to consumer by increase the merchandising monetary value to RM4.00.Now, with the same home base of nasi lemak, the purchaser demand to paid dual monetary value, therefore their purchase power lessening. Furthermore, it besides will impact the families pecuniary wealth bead.As a effect, the entire ingestion lessening, aggregative outgo cut down, and eventually affect aggregative demand bead.

Aggregate supply curve will switch based on alterations in input price.As we know that most of the houses need the oil monetary value for conveyance and present their product.When the oil monetary value addition, the houses input cost will be addition every bit good, hence, the houses will provide less outputs.then the short tally aggregate supply curve will switch to go forth, so the monetary value degree addition, entire end product lessening.When the end product lessening, the manage will seek to cut down the input cost such as layoff some bing labor.Therefore the unemployment rate will increase.

Why suppy daze will happen in Malaysia?

The first ground the affects the oil monetary value daze occur in Malaysia is because 80 % of the universe ‘s oil militias are ain by state-owned oil houses so it tend to restrict the international companies to entree ( Hour, 2009 ) . Beside, the cause of deficit of oil supply is because of most of the large located field are found in the a few decennary ago and one yearss this field will besides be used up as the natural stuff are limited in this world.Furthermore, the size of the oil field found late are really little and dearly-won to run.For illustration, if we found 10 little oil field in seperate location, that mean the houses need to put up 10 rigs compare to a large oil field they merely need a large rig.

The suppy daze can work out antomatically?

In long tally, the oil monetary value daze can be solve automatically if the authorities or cardinal bank does non implement any policy.When the oil monetary value addition, the input monetary value for the provider will be addition, so the short tally sum suppy will switch to the left, monetary value degree will increase from Po to P1, sum end product will diminish from Yo yo Y1.In the long term, the bead in the entire end product will do the houses want to layoff the employees to cut down their cost, so the unemployement rate in market will lift.The monetary value outlook of employees for higher pay will drop and do the houses have more money to increase more end products to provide. So the short tally aggregate suppy curve will switch back to right from SRAS1 to SRASo.Therefore, the monetary value degree and besides entire end product are back to equilibrium degree and the stagflation is solve.

Phosphorus

YN

Y1

P1

P0

LRAS

SRASO

Bustle

Yttrium

SRAS1

The supply daze can work out by authorities?

Although the oil monetary value daze can be solve in long term, but in the short term the citizen are suffer a batch particularly for the low income household and besides the unemployement rate addition rapidly.The umemployed citizen are depend on the money in their economy history for survive.If the monetary value degree addition more higher, they is stuck with high cost of populating without any compensation from the government.So, authorities must implement the expansionary financial policy to work out the unemployement.When inplement this policy, the Aggregate demand curve will switch rightward from ADo to AD1.Then the monetary value degree will increase from P1 to P2, entire end product will increase back to equilibrium degree of end product from Y 1 to Y2, and now Y2=Y1.The monetary value degree had addition higher than earlier, and the end product back to equilibrium degree, and the higher rising prices occur.

SRASO

SRAS1

Bustle

AD1

LRAS

Phosphorus

Yttrium

YN= Y2

Y1

P1

P0

P2

Factor to switch the aggregative demand curve

Aggregate demand ( AD ) is the entire figure of demand of goods and services in economic system. The AD is about equal with aggregative outgo ( AE ) . The factor will impact the AD curve are based on equation of aggregative outgo, AE=C+I+G+NX. In the AD curve, each point is stand foring certain degree of AE that same with the equilibrium in money market at given monetary value. When AD curve is traveling along, monetary value degree alteration as due to the alteration of equilibrium GDP but other determiners are remain changeless. When opposite way, alteration of other determiners change the equilibrium of GDP, AD curve displacement itself. Therefore, the other determiners are consumption disbursement, investing disbursement, authorities disbursement, revenue enhancements, net export and money supply.

The measure of money supplied at a given monetary value degree will impact the AD curve. When money supply is addition, the curve displacement to the right from Ms0 to Ms1. The involvement rate will drop from r0 to r1. The involvement bead due to the addition of investing disbursement and the AE addition cause the existent GDP addition. AE curve displacement upward show that the end product will diminish. At the terminal, the AD curve will switch right from AD0 to AD1 to stay the monetary value at the invariable.

Phosphorus

AE=Y

AE1

AE

Yttrium

Y0

Y1

I

r0

I0

I1

Mendelevium

r1

R

R

Ms0

Ms1

Mendelevium

Meter

r0

r1

Phosphorus

Yttrium

AD0

AD1

P0

Y0

Y1

In the others manus, if there are passing daze, means the authorities disbursement is increase, this will impact the AD curve displacement to the right. Shown from the graph below, when the addition in authorities disbursement at any given monetary value degree, the AE curve will switch upward and lift the existent GDP. when the existent GDP higher the given monetary value degree, it cause the AD curve displacement to the right from AD0 to AD1.

Phosphorus

Yttrium

AD0

AD1

P0

Y0

Y1

Phosphorus

AE=Y

AE1

AE

Yttrium

Y0

Y1

Gram

Why oil monetary value daze will impact aggregative demand curve?

Aggregate demand is based on alterations in entire demand for all concluding goods and services. During the oil monetary value daze, the oil monetary value addition in Malaysia. This addition of oil monetary value cause the monetary value degree of economic system addition. The monetary value degree affect the existent income lessening and cut down the purchase power of family. Household purchase power bead mean that the ingestion lessening. Consumption disbursement is one of the factor to switch the AD curve. When ingestion lessening, it shift the AD curve to the left from AD0 to AD1. Therefore, the monetary value will diminish from P0 to P1 and the end product besides lessening from Y0 to Y1

AD1

P0

AS

AD0

P1

LRAS

Phosphorus

Yttrium

Y0

Y1

How to work out the aggregative demand automatically?

If the authorities or cardinal bank do non implement any policy during the daze of the oil monetary value, this has to work out the aggregative demand automatically. After the aggregative demand displacement to the left from AD0 to AD1, the monetary value and the end product were reduced. When the end product bead, the employment lessening and unemployment addition. This affect the expected monetary value bead and the pay rate lessening. At the same clip, the short tally supply curve displacement to the right from AS0 to AS1. At the terminal, in the long tally, end product will return back from Y1 to the natural end product Y0, but the monetary value will maintain on lessening from P0 to P1 and P2. This cause the deflation occur in the economic system.

Y0=Yn

AD1

AS1

P0

AS0

Ad

P1

LRAS

Phosphorus

Yttrium

Y1

P2

How the authorities or cardinal bank solve the supple daze?

When the supply daze solve by automatically, it will remain back the end product value but the monetary value lessening continuously. This affect the whole market economic system and become deflation. The deflation will do the economic system down and this will do suffer to the whole state. Therefore, authorities should implement the policy to work out this job. To switch back the aggregative demand curve, authorities demand to implement the expansionary financial policy. This policy can switch the aggregative demand curve to the right from AD1 back to AD0. In the long tally, the monetary value back to the natural monetary value P0 and the end product besides change from Y1 to the natural end product of Y0.

AS

LRAS

Yttrium

AD1

AD0

Pn=P0

P1

Phosphorus

Y0=Yn

Y1

Decision

The oil monetary value daze in 2008 had brought a big impact for Malaysia ‘s economic system. After lifting in oil monetary value, manufacturers need to pay higher input monetary value for the production intent. Therefore, houses sold their goods for higher monetary value which doing consumers ‘ buying power dropped and the aggregative demand lessening. The increasing input monetary values besides doing houses to bring forth less end product which might do the unemployment rate addition.

In short tally, authorities can implement the expansionary financial policy to work out the unemployment job. However, the monetary value will increase even higher than before which might do hyperinflation. If the authorities or cardinal bank does non implement any policy during the oil monetary value daze, the job will be solved automatically in the long tally but it might do consumer to endure a batch in the short tally.

We recommend Malaysia authorities to develop sensible oil monetary value puting instrument, obtain inexpensive oil from foreign state, seeking alternate resources, give subsidies to houses and increase pay rate of workers in order to minimise the effects of increasing oil monetary value.

Throughout this assignment, we have a better understanding about the aggregative demand and aggregative supply and able to use it in existent economic system state of affairs. We had besides learned how to work in a squad expeditiously and efficaciously in footings of coaction and clip direction in order to carry through the undertaking given.

Recommendation

Increasing in oil monetary values is a serious issue that may impact aggregate supply and sum demand which bring big impact to Malaysia ‘s economic system. Appropriate ways need to be taken in order to minimise the effects of increasing oil monetary value in Malaysia. Our suggestions are as follow:

Reasonable Oil Price Setting Instrument

First, authorities demands to develop sensible oil monetary value scene instrument which may guarantee the oil monetary values are puting within a scope which is sensible and low-cost for citizens, and let realistic net income for oil industries. There are three facets that should be taken into consideration while find the oil monetary value scope, which are the consumers ‘ buying power, an appraisal of net income for oil industries in sensible degree, and the international oil monetary values. With the aid of this mechanism, Malaysia ‘s oil monetary values will be more realistic and sensible which may forestall unmanageable increasing of oil monetary values in Malaysia. When the oil monetary values are set in a sensible degree, there will be no big impact on the aggregative demand and aggregative supply curve.

Obtain Cheap Oil from Foreign Country

In order to minimise the impact of high oil monetary value, authorities is suggested to seek for the new beginnings of low-priced oil from other state. Malaysia ‘s authorities can import cheap and low quality oil from foreign state and polish it to go better quality oil which is qualified to publish to the market with lower cost. The reserve of the inexpensive oil in a certain sum is besides necessary in order to avoid Malaysia from being the victim of increasing monetary values in the inexpensive oil. With the available of cheaper oil ( input ) , houses will increase the aggregative supply of the end products which might forestall deficit of goods in the market. When there is an increasing end product in the market, the monetary value of the goods will be reduced and the aggregative demand will increase to a certain degree.

Searching Alternate Resources

High oil monetary value job merely can be solved by associate attempt of both authorities and single. In order to minimise the impact of high oil monetary value, the organisation should try to make some probe or detect the replacement of the oil like bio gas and electronic motorcycle and should seek to innovation so that the merchandise of the organisation can be produce on other options. In this state of affairs, the company can cut down the measure of the oil which used to bring forth the end product. Then, the provider or supplier would non cut down the measure of supply which affects the aggregative supply displacement to the left. On the other side, aggregative demand besides comparatively would non be affected which the curve displacement to the left because the consumer can go on to devour the merchandise in the normal monetary value.

Give Subsidies

Once the oil monetary values addition, it will straight or indirectly affect the whole production cost, including the fee of the transit or other else. In order to work out it, the authorities should supply subsidies to the provider or supplier in order to command the market monetary value. After the providers receive the subsidies from authorities, they will non increase the retail monetary value of their merchandises since they want to keep their organisation ‘s net income. By implementing this scheme, the rising prices job can be avoided because the provider would non increase the monetary value of merchandise due to the higher input monetary value. Hence, the aggregative demand and aggregative supply would non be affected.

Increase Wage Rate

In the market, increasing oil monetary values may take to rising prices job in Malaysia. This job will do our citizens suffer from fiscal load and their buying power will diminish. In this instance, authorities can raise the sum of minimal pay in order to do certain the organisation provides the cost of life to the employee. This can assist the employee are able to keep their basic demands in their day-to-day life although the high oil monetary value state of affairs happened in Malaysia. Individual who utilizing the vehicle during the day-to-day life, the oil monetary value addition will straight increase their day-to-day disbursal. Buying power of the person will be decreased and eventually it will impact the aggregative demand displacement to the left because consumer consume less than earlier. After increasing rewards rate, this job can be solved and the curve of the aggregative demand will endorse to original.