2023

Faculty of Economics and Business

Corporate Master in Business Administration

(CMBA)
22/23 Sem 1 Intake

EBB6023 Economics Theory

GROUP ASSIGNMENT
STUDENT NAME & MATRIC NO.:
1.0 Introduction
The post-end industrial revolution welcoming the electronic innovation period between the
end of 18th and beginning of 19th century. Within the transition period, human population
skyrocketed, continents connected with fast developing transportation, and multiracial
mankind greatly interacted physically causing the disease to develop further into Russian flu,
which genetically constructed and proved the world a whole new devasting pandemic that
wiped out 1 million people globally. Episode continued with the Second World War; major
advanced countries showed the world of their weaponry advancement as well as the
consequences of one-hundred million deaths within the war. New revolution set up a whole
new platform in 20th century, where both of the World Wide Web and the foundation of e-
businesses accelerate the world trade transaction. Such platforms demanded the technology to
advance even further as well as the increasing shifted workforce-population relationship.
With all above events listed, a phenomenon coherently, repeatedly, and consistently
appealing, which is the economic growth and recession, such fluctuation is repeating and
imminent to the world. With the recent COVID-19’s 0.67 million deaths and Russia-Ukraine
War as the concrete proof, the past reappeals in the repetition cycle, the world once again
witnessed and learnt. Therefore, no excuses shall blindfold the next recession in the next
future.

Diagram 1: Real GDP growth forecast for 2021 in ASEAN economies.

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 As the world suffering a major recession from the recent major turning point event
such as COVID-19, our country, Malaysia also undeniably involves and suffers moderately
as the rest of most of the world does. During the forced recession period, a 5.2% decline in
the year 2020 was fall on Malaysia. Such unfortunate is directly responding to the movement
control order (MCO) declaration on 18th March 2020. During the MCO, most of the economic
activities fall under the effect of restriction except for the essential services. In line with
Prevention and Control of Infectious Diseases Act 1988, the Malaysian government shut
down the travel and tourist industry along with most of the country does, causing a drastic
drop in foreign transaction net flow. Along with ASEAN together during the year 2020,
economic crisis hits all causing a mega reduction in GDP growth. However, an enormous
rebound is expected to be happening for the following year 2021 as the “reduction covid
case” scenario consistently improving.

In other aspects during the recession, Malaysia’s industry experienced various

impacts that collapsing and booming at the same time. In the MCO period, the
unemployment rate had increased to 5%, the highest it has been since 1990. Companies
downsized and reduced the workforce to tackle the MCO. Such happening not only causes
the country to suffer from contemporary average salary reduction. It also causes unstable
supply and demand of the necessity product due to the changing of consumer spending
pattern. I.e., food related industry suffers from high demand and insufficient supply, the
entertainment and catering industry suffers from low demand, the heavy machinery
manufacturing industry suffers from low demand due to travelling restriction, etc. On the
other hand, due to MCO restrictions, consumers switched the physical shopping method to e-
retailing method. Both the delivery and e-commerce industries were domestically boomed to
feed the local demand. Such industries must solidify and diversify as one of the aces to flip
the future recession impact into opportunity gain.

This assignment shall be completed by integrating the quantitative approach, current

economic condition, and Malaysia’s economy recovery phase to analyze, understand and
forecast the imminent pattern to get to grips with the upcoming predictable recession in a
macroeconomy manner. In cooperating with global countries and regional comparisons such
as UK’s economic downfall, and China positive GDP growth during the recession period,
Malaysia economy can learn from both the best and the worst to fortify and diverse toward
financial stability and fast respond to reduce any possible devastating monetary loses in the
near future recession.

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2.0 Analysis of the Recovery phase
During two years of lockdown, most of the countries experienced various degrees of
financial crisis in their country. The countries have no choice but chose to reopen their border
for international travellers due to economic pressure inside their countries same as Malaysia.
The economy was finally going into the recovery phase. In this analysis, related economic
issues in the recovery phase would be discussed. What impact is still ongoing in the market
and the way of government reacts to the current economy.

2.1 Poverty and social inequality

As the latest Ipsos poll showed poverty and inequality occupied 31% which was the
second largest proportion, it represents many industries still cannot recover from the
pandemic. Those affected industries grow very slowly in the recovery phase. This might be
because the skilled labour forces still cannot be got back to their normal income levels such
the aviation and tourism industries. They are the labour force with special skills but only have
a few job opportunities in the market. Many companies still facing a financial crisis from the
Covid-19 pandemic caused they do not have a plan to hire more workers. The local
businesses that rely on the tourism industry are also forced to shut down their business to
reduce their loss. As the country just steps into a recovery phase, many firms are not
confident in hiring a large number of workers into their production. Therefore, the poverty
rate in Malaysia was still higher than expected. In comparison, e-retailing and logistic-related
industry were benefited from the Covid-19 pandemic. People going out less to reduce the
chance to get the infection gave rise to online business expansion. The change in shopping
methods bringing the two industries to grow fast and the labour force working in the related
industries normally had higher income which leads the social equality gap becoming bigger.
The reason why these two industries’ workers could have a higher income is that the demand
curve of its labour shifted rightward from D0 to D1 and pulled the price level of workers to
rise from P0 to P1 to meet the equilibrium. The price of e-retailing and logistic-related
industries workers turns higher at this moment.

2.2 Fiscal Policy

The government had prepared various aids for citizens through the yearly national
budget and Bantuan Prihatin Rakyat Program. The total expenditure of the 2022 Budget was
as high as 332.1 billion ringgits which was the largest amount in recent years. According to
Budget 2022 prepared by the Ministry of Finance Malaysia, the government would focus on

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strengthening recovery, building resilience and driving reforms. The government not only
reduced taxes and gave out various aid plans to local small businesses, but they also allocated
funds to encourage firms to hire fresh graduates. They even provide wage subsidies to reduce
the burden of SME employers. The government also made an exception to approve the EPF
(Employees' Provident Fund) withdrawal so that citizens could overcome their difficulties
temporarily. All these decisions were to revive the economy so that the economy could back
to normal faster. However, the reduction in taxes caused the government income to shorten.
Aids and other assistance programs even widened government expenditure. The government
would have to increase their borrowing by selling more bonds.

2.3 Monetary Policy

Bank Negara (central bank) also react in the recovery phase by lowering the interest
rates. Money saved in banks became less attractive to citizens so, the cash in hand increased.
The low-interest rate also makes the loan application’s requirement easier. As a result, they
tend to spend more and borrow more from banks. While the world factory, China decided to
continue to restrict their country’s border, international investors managed to switch their
investment projects to ASEAN countries. Therefore, an attractive interest rate would
definitely incur some international investors coming to Malaysia after the border reopens.
The information provided by Malaysia Investment Development Authority (2022), stated that
a total of RM208.6 billion in Foreign Direct Investment were approved in various economic
sectors manufacturing, services and primary sectors which is the highest record since 2006.
Reduction in interest rates also encouraged old investors to remain in the market. Loanable
money was increased in banks to attract firms to invest more in their business and also
attracted more entrepreneurs to come into the market then the unemployment rate declined
due to the job market expanding. Diagram 2 shows the quantity of money increased causing
the supply curve (SM) shifts to the right. The old interest rate would decline from i0 until it
meets the equilibrium point. Then, a new interest rate was created (i1).

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Diagram 2: The money supply shifts rightward and pull down the interest rate.

Both fiscal policy and Monetary Policy used by the government impact a large
amount of money supply going into the market. As Ganti A. (2022) explain the multiplier
effect in Keynesian economics, government spending will ultimately lead to an increase in
economic activities which will help to boost aggregate demand and produce more income
opportunities for firms. Meaning to say, with every additional money government spent,
additional economic activities increase in the market.

Diagram 3: How the Multiplier effect works in an economy.

Diagram 3 shows how the government uses the Multiplier effect to stimulate the
economy in the recovery phase. The government managed to distribute subsidiaries and open
for EPF withdrawal causing money liquidity in the market to increase. Then, the additional

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money citizen got would be used to consume goods and services. It would push up the
aggerate demand to enhance. This encourages firms to raise their output by offering more job
opportunities. As a consequence, GDP grows and improves the unemployment rate in the
country.

2.4 Aggregate Demand and Inflation

Meanwhile, citizens consume too much resulting in a rise in Consumer Price Index
(CPI). “Too much money chasing too fewer goods” circumstances happen because citizens
have additional money to spend. When aggregate demand is much more than the market can
supply, the price of goods or services increases, which also leads to an increase in the living
cost in general. Higher consumption, investment and government expenditure lead to the
Aggerate Demand curve shifting to the right as shown in Diagram 4. The shift that moves the
equilibrium from E0 to E1 where an increase in the quantity of output but a higher price.
Shortage in supply caused Demand-pull inflation to bring up the prices (Chen J. 2022).

Diagram 4: The Aggerate Demand shifted and affect the price level.

2.5 The Russia-Ukraine conflict affects Malaysia’s Economy

In addition, the Russia-Ukraine conflict aggravates the world economy became worse.
The majority of UN state members boycott Russia through economic sanctions bringing
international trading was cut down by a great amount. Malaysia’s economy has also been
affected. Lack of resources pushed the raw materials and food prices to go up by then the cost
of production is raised. In order to cover the additional fee that occurs in production, the firm
only can raise its price. The additional fee has been transferred to the consumer in the end.
So, consumers have to pay for finished goods at a higher price. Some production lines even
have to extend their product delivery date because of the low output. For example, the price
of chicken feed was multiplied because Russia and Ukraine occupied quite a big percentage

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of the production of corn and wheat in the global market. High costs forced the local edible
poultry industry to cut down the number of chickens thus, caused a shortage of chicken in
Malaysia. Although the government decided to ban the export of chickens, the price of edible
poultry in Malaysia was still significantly higher than before. As the edible poultry industry
cut down its livestock scale, the national productivity goes down. As the edible poultry
industry cut down its livestock scale, it drives national productivity to go down. The SRAS
shifted leftward pulling the price raise from P0 to P1 and real GDP became lower than the
existing rate.

Diagram 5 shows the Aggregate Supply for all the goods and services in Malaysia affected by
the Russia-Ukraine conflict in the short run.

2.6 Net Export and Trade of Balance

From the Malaysia External Trade Statistic Bulletin (Department of Statistics
Malaysia, 2021), agricultural products only contribute 8.9% of total export. The major three
products for export are electronics, chemical-related products and palm oil base products. A
poultry export ban would not have a huge impact on the macroeconomy. Consequently, the
statistic shows there was a trade surplus in the country’s current account. This means the
country has sustainable payments coming in than payments going out. It would also help the
country to hold more foreign currency reserves to keep the value of Ringgit Malaysia at a
certain rate in case of an economic crisis happen later. According to Bernama (2021), Bank
Negara said the foreign currency reserves position was sufficient to finance 7.7 months of
retained imports and was 1.2 times the total short-term external debt. Overall, the country’s
debt management is in good shape.

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3.0 Recommendations
If I’m a Prime Minister of Malaysia, I will think of some strategies to solve the
situations that the society faces today. Society faces a short-run trade-off between inflation
and unemployment. Therefore, the trade-off is important in analysing the business cycle since
it includes variations in economic growth such as employment and productivity. Every
nation's government takes steps to assist the economy in achieving its goals of growth, high
employment, and economic stability. The government has an impact on economic activity
through monetary and fiscal policy. The government utilises its ability to modify interest
rates and money supply via monetary policy. It does, however, employ its ability to tax and
expend through fiscal policy. Not only that, but the government should also implement
certain alternative policy tools, such as price ceilings and price floors, since policymakers
think that market prices are unjust to purchasers and sellers. Inflation will occur today due to
a rise in the general level of prices in the economy. The increase in the value of money is a
major cause of inflation. When such amount of money increases, the value of money
increases indirectly. Then, it will cause the value of the money to fall. Not only that, but
inflation is also a specified rate of change in general prices of goods and services that are
expended daily. We can have low inflation rates in spite of high prices of goods and services
in our daily life. When inflation is too high, then it is not good for individuals and the
economy in Malaysia.

Therefore, I believe that some steps should be taken to limit the cost of products and
services because as inflation benefits both individuals and the Malaysian economy.
Government should do their best to research the subject of inflation so that adequate price
management of products and services may be applied to appropriate market defects. I also
propose that monetary policy be used to reduce the money supply and boost interest rates.
Whereas when interest rates are higher, borrowers must pay extra for the money they
borrowed, and banks seem to be more cautious in issuing loans. Since the money is so well-
fitted, borrowing money is much more expensive, hence demand for products and services
will fall, and so will prices. Ideally, the inflationary concerns will be resolved. In Malaysia,
there are three forms of unemployment: structural, frictional, and cyclical. Natural
unemployment includes both structural and frictional unemployment. Structural
unemployment arises when the demand for labour in a particular labour market is greater than
the supply of labour. Long-term unemployment is typically associated with structural

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unemployment. Lack of skills causes structural unemployment. The only way to get rid of
such unemployment is to re-educate the unemployed in aptitudes so that they learn new
technologies and are thus absorbed in expanding economic sectors.

Therefore, the government need to help unemployed people through some effective
campaigns. Hopefully, through these campaigns will guide them some skills that is needed
during their work in every sector. Frictional unemployment occurs when employees quit their
previous jobs but are yet to find new ones. Most employees quit voluntarily, either due to the
need to relocate or because they have saved up enough money to hunt for a better position.
Frictional unemployment is a normal component of the job-hunting process. Short-term
unemployment can have a negative effect on the unemployed. This frictional unemployment
will force households with little savings to fall behind on bill payments and go more in debt.
Short-term unemployment can cause anxiety and undermine one's self-esteem. A graduate
student cannot always expect to discover a career that fits his or her talents right away. This
phase of looking for work is referred to as frictional unemployment. In reality, frictional
unemployment is beneficial to the economy because it permits employees to migrate to
occupations where they can be more effective.

Therefore, government should need to reduce unemployment benefits. I would like to

lower the benefits so that can encourage unemployed people to get an occupation quicker.
Nevertheless, it is not that clear because it may encourage unemployed people to get an
occupation that is not really suited to their skills. Cyclical unemployment occurs when an
economy's entire demand for goods and services is insufficient to maintain full employment.
It happens in the periods of showing economic growth or in the periods of showing the
economic reduction. Cyclical unemployment is related to the business cycle. It is because
when the economic activity is increased, it will show a situation that is an expansionary stage
of the business cycle. It will cause the unemployment inclines to drop in the periods of
growth because the buyers will purchase more goods and services and the sellers will have
more sales with businesses are producing more products. As a result, these improvements in
production and sales typically necessitate the hiring of additional employees, resulting in
higher hiring and a drop in the overall unemployment rate. Nevertheless, if the economic
activity is decreased, then the unemployment will increase. It is because employers will start
to dismiss those employees who are not needed, which raises the unemployment rate.

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 Moreover, Malaysia government should like to suggest using the monetary policy,
fiscal policy and also some other specific initiatives such as Great Recession to reduce the
problem of unemployment which the society faced today. Additionally, government should
put more focus on the expanding output, which the policymakers can have a good
achievement in increasing the demand so that the cyclical unemployment will be reduced by
creating more occupations. The unemployment rate in Malaysia raised at 3.3 percent in
September of 2019, unchanged from the corresponding month the previous year. The number
of unemployed increased by one percent from a year earlier to 521.4 thousand, while
employment went up two percent to 15.23 million. Moreover, the labour force rose two
percent t0 15.75 million. On a seasonally adjusted basis, the jobless rate was also raised at 3.3
percent in September same as in August. As a result, Malaysia's rate of unemployment was
3.28 % from 1998 until 2019, with a peak of 4.50 percent in March 1999 and a low of 2.70
percent in August 2012. The term "economy" is derived from the Greek word meaning "one
who administers a family." If Malaysia's economy is to improve, it needs a market. As a
result, markets are often an effective means of organising economic activity.

As a result, households pick what to buy and who to hire, while businesses determine
who to hire and what to create. It is concerned with both supply and demand. The terms refer
to people's conduct in marketplaces as they engage with each other. Buyer and seller action
naturally leads markets toward equilibrium. Buyers and sellers are required in a market.
Buyers drive demand, whilst sellers influence the market supply. Whenever the price of a
commodity rises, the quantity required falls, according to the rule of demand. It has an
inverse connection with one another. The total of all individuals wants for a specific
commodity or service is referred to as market requirements.

Besides, the government should increase the demand by cutting the tax and increasing
spending of the government. It is because the lower income tax will increase the income and
encourage the consumer to spend. Then, the higher the spending of government is not only to
create jobs but also provide an economic stimulus. However, the amount provided of
products grows when the price of the commodity rises, according to the rule of supply. It
shows a positive relationship to each other. As a result, supply-side economics predicts that
lower tax rates will boost economic development by motivating individuals to work more,
save even more, and investment more. If I am a Prime Minister of Malaysia, I would like to
suggest a critical theory that is giving tax cuts to high-income people produces greater
economic benefits than giving tax cuts to lower-income folks. When Malaysia is in a decline,

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the government will increase spending, reduce taxes, or do both to expand the economy of
Malaysia. When the government takes in more money which is given in a year than it spends,
it will cause a budget surplus. If the government spends more than it takes in, it will have a
budget deficit. Hence, deficits have occurred more often than surpluses, the government will
spend more than it takes in. The cumulative sum of deficit is the national debt. Controversy
occasionally surrounds the pricing and quantities determined by demand and supply,
particularly for things deemed needs. As a Prime Minister of Malaysia should consider that
market prices are unjust to consumers and sellers, and that additional policy tools may
commonly meet its stated goals of prices control legislation and reducing some of its costs
and trade-offs. Governments are the most prevalent source of price limits on essential items
like food as well as energy items. Price controls are rules which the government enacts to
alter prices. Price limits are classified into two types: price ceilings and price floors. Price
ceilings are the highest prices set by the federal government for particular products and
services which they believe are being offered at exorbitant costs and hence require aid in
acquiring. Rent control is a well-known example of a price cap since it controls rent
increases.

The government, on the other hand, uses price floors to keep prices from becoming
too low. The most prevalent price floor seems to be the minimum wage, which ensures that
suppliers would not sell their labour for less than the agreed-upon price, although if demand
will increase are ready to pay less. Price floors are often used in agriculture to try to protect
the farmers. Manufacturers will not create as much at the reduced price, but customer demand
will grow since the items are less expensive. Governments will set the price floors for a
number of reasons, but the result is an increase of supply and decrease the demand. As a
result, a price ceiling prevents prices from growing above a specific level, and a set price
prevents prices from falling below a particular level. In conclusion, if I am a Prime Minister
of Malaysia, I will do my duties and for aiding and advising the president in the distribution
of the works for the government so that the situations that the society faces today can be
solved. A government need to look into these problems deeply. Monetary policy ought to be
used to reduce the money supply and boost interest rates in order to alleviate the issue of
inflation. To solve the unemployment in Malaysia, some of the unemployed people should be
re-educated so that they can learn some new technologies and are thus absorbed in expanding
economic sectors. So, Malaysia govt should put more focus on the expanding output, which
the policymakers can have a good achievement in increasing the demand so that the

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unemployment will be reduced by creating more occupations. Furthermore, a critical theory
can be defined, arguing that tax cuts for the wealthy create higher economic gains than tax
cuts for the poor. Last but not least, the govt should employ a few alternative policy
instruments to attain the stated aims of the price control legislation. Hopefully everything
goes well as the economies of Malaysia is going to get better.

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4.0 Conclusion

History consistently hints the humanity all the way since the Industry Revolution to
prove that economy is fragile against risk such as war eruption, pandemic outbreak, and
natural disaster. Such risks are imminent and unavoidable against the rate of human
advancement. To turn the tide, potential risks must be averse with new opportunities.

With current apparent observation, digital industry contrasted along with other
industry with better performance during the recession. Further embracing the digitalization
not only allow the country to run certain essential industries during the pandemic, it also
allows process optimization through the integration of Artificial Intelligent and machine
learning. Which may accurately predict the best equilibrium to run the business in a dynamic
environment.

Alternatively, new industry exploration and innovation can also be part of the key
indicator to tackle the future recession. Currently, Sarawak, Malaysia local government has
committed a target to be a hydrogen producer by the year 2027. Such commitment is well
visioned and shall be materialized to support the ahead demand for hydrogen-powered
machines. During the pandemic, Malaysia transparently displayed the weakness of the
biotechnology sector. The foreign manufactured vaccine is fully utilized throughout the
vaccination process. However, it is quite a delay due to insufficient supply which lead to a
greater number of casualties. Therefore, mistakes should not be repeated, and the
biotechnology sector must revamp to be ready for the next wave of predictable pandemic.
Nevertheless, the government believe that the pandemic also allows them to reset and align
the strategics to achieve this aspiration with the vision as guiding principles.

In October 2019, Mahathir have announced a new high-income target called Shared
Prosperity Vision 2030. To achieve as a High-income country, the Malaysia government
must set up various strategies to improve gender equality, employment levels, education
level, social security systems and accessibility of technology. The 10- year initiative was to
guide the Malaysian economy toward sustainable growth with fair and equitable distribution
across income groups, ethnicities, regions and supply chains, providing a decent standard of
living for all citizens by 2030. Up till the present moment, it still a long way to go. Achieve
it by 2030 is a good vision to encourage the government to develop the country in this way
but the current environment seems not so optimistic.

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5.0 References
1. Bernama (2022), Bank Negara’s international reserves at US$116.9 bln as at Dec 31,
Bernama 07 January, Available at https://bernama.com/en/business/news.php?
id=2041217 [accessed 17 January 2023]
2. Chen, J. 2022, What Is Demand-Pull Inflation?, Investopedia, Available at
https://www.investopedia.com/terms/d/demandpullinflation.asp#:~:text=Inflation
%20is%20a%20general%20rise,to%20this%20type%20of%20inflation. [accessed 19
January 2023]
3. Department of Statistics Malaysia (2021). Malaysia External Trade Statistics Bulletin,
December 2021. Available at
https://www.dosm.gov.my/v1/index.php?r=column/cthemeByCat&cat=139&bul_id=
YUh5aTBOazIxdEwzb1QwaG1TdnlzZz09&menu_id=azJjRWpYL0VBYU90TVhpclByWjd
MQT09 [accessed 17 January 2023]
4. Ganti, A. 2022 , What Is the Multiplier Effect? Formula and Example. Investopedia,
Available at https://www.investopedia.com/terms/m/multipliereffect.asp , [accessed
19 January 2023]
5. Kian Ming, Ong (2022) ‘How Russian invasion of Ukraine affects the average Malaysian’,
Free Malaysia Today, 1 March. Available at
https://www.freemalaysiatoday.com/category/opinion/2022/03/01/how-russian-
invasion-of-ukraine-affects-average-malaysian/ [accessed 17 January 2023]
6. Malaysian Investment Development Authority (2021). Malaysia’s Foreign Direct
Investment (FDI) Inflows Rebounds Above The Pre-Pandemic Levels. Available at
https://www.mida.gov.my/malaysias-foreign-direct-investment-inflows-rebounds-
above-the-pre-pandemic-levels/#:~:text=In%202021%2C%20a%20total
%20of,highest%20FDI%20recorded%20since%202006.[accessed 17 January 2023]
7. Ministry of Finance Malaysia (2021), Budget Official Website, Available
at :https://budget.mof.gov.my/en/2022/ [accessed 20 January 2023]

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