OUM BUSSINESS SCHOOL

SEMESTER 5 / 2017

BBEK 4203

Principles of Macroeconomics

MATRICULATION NO: 920510055012001

IDENTITY CARD NO. : 920510055012
TELEPHONE NO. :016-6983026
E-MAIL : sivabalanmaithily@yahoo.com
LEARNING CENTRE : Negeri Sembilan
E-tutor’s name :Rima Bt Abd.Rahman

0
INSTRUCTIONS
 Do not copy the assignment question and instructions to your answer.
 Prepare your assignment answer following the layout of the ASSESSMENT
CRITERIA shown in the RUBRICS provided for the course. Where RUBRICS are
not provided, follow the instructions/guidelines specified by the Faculty for the
assignment concerned.
 Your assignment should be between 2500 to 3000 words (depending on number
of words outlined in the assignment instruction) EXCLUDING references.
 Type your answer using 12 point Times New Roman font and 1.5 line spacing.
 Show the number of words at the end of your assignment.
 Tables and figures where provided, should be appropiately titled.
 List your references separately in the APPENDIX page.

1
What is monetary policy?

Monetary policy is defined as the action by which the government, central bank, or other
regulatory committee determine the size and growth rate of the money supply, which
affected the interest rates, by controlling the supply of money, availability of money, and
the cost of money or interest rate in achieving economic growth and stability. It is also
known as credit policy. Monetary policy is also regarded as expansionary and
contractionary policy, where expansionary policy enhances the total availability of money
throughout the market more quickly than usual, and contractionary policy expands the
money supply slower than usual or even shrinks it. Expansionary policy is traditionally
accustomed to prevent unemployment in the recession by lowering rates of interest with
the hope so easy credit will entice businesses into expanding, whereas, contractionary
policy is designed to reduce inflation in order to avoid the resulting distortions and
deterioration of asset values. Put simply, monetary policy rests about the relationship
relating to the rates within an economy, which is the price at which the bucks can be
borrowed, as well as the total supply of money. "A policy which influences the population
stock of cash substitute of public need for such assets of both that is certainly policy
which influences public liquidity position is actually a monetary policy,” says
A.G.Hart(2000). Hence, economic growth, inflation, rates with other currencies, and
employment will likely be affected. In Malaysia, The Central Bank of Malaysia manages
monetary policy, which is amongst the ways to control economy. If the method of getting
money increase, the interest rate of inflation increases if the development of the cash
supply is slowed a lot of, then economic growth might also Based on H.Johnson
(2010)``A policy medical records central banks control over the supply of income being
an instrument for having this objectives of general economic policy is often a monetary
policy."

2
The Variables In Monetary Principle

Cushman and Zha (1997) and Dungey and Pagan (2000) have imposed instruments in
the monetary policy which is the reserve equipment,interest rate,open market operations,
credit regulation.The reserve equipment which is popular by the central bank is reserve
requirement. The central bank may need Deposit Money Banks to carry a portion or a
variety of their deposit liabilities (reserves) as vault cash or deposits with it. The
fractional reserve will limit how much loans that banks may make on the domestic
economy, and, thus limit the cash supply. The assumption is the fact that Deposit Money
Banks generally maintain a stable relationship between their reserve holdings and the
amount of credit they extend to the population. During inflation, commercial banks can
get treasury bills with excess reserves and do not have to reduce how much time deposits
in order that the money supply in the economy isn't reduced. Finally the bank rate hike
policy and operational sell treasury bills or government bonds in view market will fail.
During deflation, exactly reserves (statutory and liquid assets) ought to be lowered from
the central bank to improve the ability of commercial banks to deliver credit and for that
reason to improve the investments in the country. Finally, the money supply throughout
the market improves and deflation can be overcome.

The next instrument of economic policy is open market operations. The central bank buys
or sells securities to the banking and non-banking public, that is incorporated in the open
market. One security is Treasury Bills. When the central bank sells securities, it cuts
down on the supply of reserves when it buys the securities back, by redeeming them, it
will raise the availability of reserves to the Deposit Money Banks, thus affecting the
provision of greenbacks. During inflation, money supply throughout the market should be
reduced. The central bank will sell treasury bills or government bonds to commercial
banks along with the public. With this particular, the cash held through the commercial
banks along with the public is reduced, thus how much cash that can be spent on the
transaction can be reduced also, inflation finally overcomes. During deflation, the cash
supply for the overall design must be added. The central bank will buy Treasury bills or
government bonds from commercial banks as well as the public. With this, the bucks held

3
with the commercial banks and the public increases, thus how much cash which can be
used on the transaction might be improved also, eventually overcome deflation.

The other instrument of monetary policy commonly used with the central bank is interest
rate, the place that the central bank lends to financially sound Deposit Money Banks at
the most favorable rate of interest, called the minimum rediscount rate (MRR). The MRR
sets the bottom for that interest rate regime inside the money market, the nominal anchor
rate, and thereby affects the production of credit, the supply of savings (which affects the
supply of reserves and monetary aggregate) and the supply of investment (which affects
full employment and Gross Domestic Product, GDP).During inflation, the central bank
will raise rates to increase the expense of loans granted by commercial banks with their
borrowers. That is to scale back the borrower's ability to do business, this causes reduced
aggregate demand and therefore lower the typical price range, inflation is finally
resolved. During deflation, the central bank will lower rates to scale back the price of
loans granted by commercial banks on their borrowers. This is to raise light beer you to
execute the transaction, this will cause increased aggregate demand and thus increase the
level of employment, deflation finally resolved.

Apart from that is credit regulation. Under this technique, consumer credit supply is
regulated through hire-purchase and installment sale of consumer goods. Under this
process the down payment, installment amount, loan duration, has limitations upfront.
This assists in checking the credit use and then inflation in the country. During inflation,
the central bank will minimize people from purchasing the vehicle on installment credit
by enhancing the minimum advance payment, reducing how much credit loan and
shorten the payback amount of installment credit this will likely reduce ale visitors to buy
vehicles on credit installments. During deflation, the central bank will persuade folks to
get vehicles on credit installments by reducing the minimum payment rate, helping the
credit amount and extend the credit repayment installment credit this will raise the ability
of individuals to purchase vehicles on credit installments.

4
Central bank also uses fixing margin requirements method. The margin means the
proportion in the amount you borrow which isn't financed from your bank. Changing a
margin implies a modification of the financing size. Using this method is employed to
stimulate credit supply on the needy sector and discourage it for other non-necessary
sectors. This can be accomplished by increasing margin for that non-necessary sectors
through reducing it for other needy sectors. During inflation, the central bank will
eradicate individuals from buying stocks for speculative purposes by raising margin
requirements to reduce the loan amount allowed by speculators. During deflation, the
central bank will persuade folks to accumulate the shares for speculative purposes by
lowering margin requirements so that you can raise the amount you borrow allowed by
speculators.

5
Effects of the monetary policy on Malaysia economic growth.

To make the economy of the each country rise in a great achievement, monetary policy
plays a crucial role to regulate the eye rate and its particular affect investment. By
reducing rate of interest, the investment level for the overall design may be encouraged.
The growing in investment will lead to an instant economic growth. Monetary policy is
also responsible to take care of income and cost stability throughout the market so your
faster economic growth is possible.

Inflation and deflation can't be avoided. The price instability will probably be occurring.
From that, monetary policy will solve inflation and deflation with trying to keep the need
for money stable by lessening the wages and wealth inequalities .When inflation occur,
Bank Negara Malaysia use dear money policy to manipulate extra liquidity in the sell to
avoid inflation from is constantly on the spread. Money will likely be blocked by Bank
Negara Malaysia to prevent inflation and raising price. It is about challenging have the
money. It is costly. Government helps it be hard to get money through loans so that
there's less cash at the disposal of people thereby their purchasing power is contained.
When more money that folks has so, they're going to buy a lot. But, the availability in the
goods is less out there. The price tag on products and services increase due to many
money and individuals prepared to pay more. When deflation occurs, Bank Negara
Malaysia use easy money policy to stimulate investment and economy growth. Usually,
in line with the policy, it'll decrease interest paid by bank to loan money as a way to
increase economy activity. Lower bank borrowing rate will lead customer borrowing that
can increase requirement for the goods and services.

Monetary policy also plays a huge role towards exchange rate. Foreign population will
suffer confidence inside our economy if your exchange rate is not stable. So, from that
monetary policy aims to keep up stability in the exchange rate.The disequilibrium always
occurs if you find surplus and deficit in balance of payment. The actual surplus in balance
of payment will reflects a surplus money supply inside the domestic economy while the

6
deficit could make stringency of money. So, from that monetary policy will need
responsibility to take care of the equilibrium to experience it.

Within a country there will be unemployment. Full employment is actually difficult to

realize. Monetary policy can be used for achieving full employment. If the monetary
policy is expansionary then credit supply can be encouraged. It might help out with
creating more jobs in various sector with the economy. As we all know, the purpose of
expansionary is to avoid unemployment by decrease in monthly interest to make easy
credit.The function of cash is not only just to generate exchange however it is more
importantly. Monetary policy should regulate the supply of money. The progres in money
supply creates monetary disequilibrium. Thus monetary policy needs to regulate the
production of income and neutralize the consequence of greenbacks expansion.Monetary
policy can help and play a supplementary role in attainting a financial equality. Monetary
policy can make special provisions for the neglect supply including agriculture, small-
scale industries, and village industries and after that provide them with cheaper credit for
term. Monetary policy can help decreasing economic inequalities among different areas
of society.

7
The effects of the monetary policy on rate of unemployement in Malaysia

There are bonded between inflation rate and unemployment rate that's known in the event
the inflation rates are high, how much unemployment is low. What this means is the
reciprocal linkage between inflation unemployment rates of people.You can find three
forms of unemployment in Malaysia that are unemployment frictional, unemployment
structural and unemployment circle cyclical.

Unemployment frictional is raised from normal labor market turnover where individuals
are choosing to move among job of individuals, careers options and location. Think of it
as fixed and healthy conditions which can be resulted from your mismatching between
workers and jobs. Unemployment structural is usually the result of mismatch of skills of
unemployed works and availability jobs available in the market. Seasonal employment
can participate the structural unemployment too. Example, fishing, agriculture or
construction work. Unemployment circle-cyclical is in connection with the dynamics of
monetary growth and factors of production in periodic business. At some peak situation
cyclical unemployment is going to be considered less than normal unemployment and
when business cycle have reached their normal unemployment, cyclical unemployment is
elevated unemployment. Additionally, it arises when economic facing recession for the
reason that market labor supply exceeds the demands through the employers as a result of
widespread decreased in spending and consumption throughout the economy. As an
example, someone lost his job during economy recession and rehired again when the
economy experiences expansion.

The presence of more than 2.7 million workers in Malaysia had become a pertinent issue
which effected the economic growth. According to Firman Shah (2012), he had mention
the presence of foreign worker had omitting and smoothening up labor shortages in
certain areas of work in Malaysia. They had played complimentary roles to domestic
labor in covering up and fulfilling the demand for labor market in Malaysia which help to
stable the unemployment rate and fluctuates range between 2.9% to 3.6% per year within
last one decade (The Composition of Malaysia Population 2010) For monetarist, the use

8
of foreign worker had given effect on the unemployed graduates which later turn into a
worrying trend to Malaysia. However, during financial disaster, the whole retrenched
personnel are total majority workers which argue the displacement of these.

9
Ways to boost economy using monetary policy in Malaysia.

The implementation of monetary policy alone wasn't adequate. Monetary policy will
likely be effective when all policies which are fiscal and monetary policy were
implemented together. Consumption spending and inflows of short-run speculative
capital had emerged as important influences on the potency of monetary policy. Monetary
aggregate also play an important role in cases like this. Furthermore, the effect of
monetary policy on interest movements and exchange rate development couldn't be
prevented. Malaysia can't effort to possess a higher monthly interest to get further capital
inflows. This will likely dampen productive investment and business. External and
internal prices stability ought to be maintained no matter what. Malaysia experience had
demonstrated that implementation of economic instruments is capable of doing this
balance. For each and every instruments, there belongs to them strength and weakness
which complement each other to enhance the attainment from the desired goals.When
having high inflation, Malaysia must make use of dear money policy which can be tight
policy that controls the money out there. Bank Negara Malaysia expands the money
supply less quickly than normal and even shrinks it.

The amount of money will probably be difficult and dear to obtain. Government makes it
difficult to get money through loans so that there is less of your budget to people in
addition to their purchasing power might be control. And therefore, it will reduce
inflation. The Gdp (GDP) rate in Malaysia averaged high in in history from 2000 until
2012. The development of population grows quicker than the employment opportunities
generated out there. Affected by it will be the low rate of unemployment in Malaysia
which are large corporate buffer and the use of foreign labors. Migration will be the
biggest threatened to Malaysia economy. There are significant quantities of workers
which migrate abroad especially high and educated people. Their migration is caused by
our prime demand and much better job opportunities from abroad for particular skills and
professions. This large population of skilled migrate works for particular profession will
discourage investment and slow up the economic development of a country. Government
need to take this challenge into consideration and resolve with a thoughtful way to

10
encourage the local labors work and contribute to their own country. This will avoid job
outsourcing to Europe as well.

11
Conclusion

Monetary policy play part to try in economic growth by stabilizing in influencing through
several channels. For instance in price stability, by increasing in price level achieve is
adjudged substantially to be a monetary phenomenon, monetary policy uses its tools to
effectively check money supply using a view to maintaining price stability in the medium
to lasting. The expectation in economic activities will be higher and give rise to higher
consumer spending and attractive companies investment by cut monthly interest to really
make the expense of borrowing, resulting higher investment activity along with the
purchase customer durables. The misconduct of economic policy will even effected
inflation, unemployment, excessive foreign workers, exchange rates, current account
deficits, excessive public debt and regards to trade. This will also lead to look for the
political stability along with the economic performance of the country.

12
References

A.G.Hart,2000 .Monetary Policy And The Stock Market: Theory And Empirical
Evidence. Journal Of Economic Surveys, 15, 491-541.

Cushman, D. O. & Zha, T. 1997. Identifying Monetary Policy In A Small Open Economy
Under

Flexible Exchange Rates. Journal Of Monetary Economics, 39, 433-448

Dungey, M. & Pagan, A. 2000. A Structural Var Model Of The Australian Economy. The
Economic

Record, 76, 321-342.

Firman Shah,2012. Sectoral Effect Of Monetary Policy: Evidence From Malaysia. Asian
Economic

Journal, 19, 83-102

H.Johnson,2010 . The Relative Important Of Monetary Policy Transmission Channels In

Malaysia.

Cama Working Paper Series. The Australian National University

http://www.nst.com.my/business/latest/monetary-policy-to-support-growth-bnm(Jan-
2014)

13