Question 1 a. Describe the functions of automatic stabilizers in helping to mini

Question

Question 1

a. Describe the functions of automatic stabilizers in helping to minimise the fluctuations in the economy. (10marks)
b. Explain two limitations of the discretionary fiscal policy (10marks)

Question 2

a.Describe the difference between inflationary gap and deflationary gap. (12marks)
b. Illustrate the impact of the followings on Malaysian’s GDP and price level in the short run:
i. oil prices rise (2 marks)
ii. a permanent increase in productivity (2 marks)
iii. a increase in export demand (2 marks)
iv. a fall in wage rates (2 marks)

Question 3
Explain the various types of inflation and its consequences. Suppose you borrow $1000 from a bank at 5% interest for one year and the inflation rate that year is 10%. Was this loan advantageous to you or to the bank? Discuss. (20 marks)

Explanation / Answer

Question 3. The loan was advantageous to the bank and not to the borrower. In order for the borrower to benefit from the interest rate it has to be equal to or above the inflation rate. anything less then that causes depreciation of the dollar. $1000 with 5% interest will be $1050, however with 10% inflation what your money is worth is 1050-105=$945

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