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The Malaysian economy is facing downtime which is worse than the Asian Financial Crisis of year 1998. The number of subsequent events, starting from political jitters, followed by the outbreak of deadly coronavirus disease and then the crash of oil prices have led to slowdown in the economy. However, there are many fiscal and monetary measures taken by the government and reserve bank of Australia to combat recession in the economy.
The newspaper article, “Malaysia macro update – It’s downtime” will help to analyse the fiscal measures by the government of Malaysia on the aggregate demand and aggregate supply of the economy. The monetary measured introduced by Bank Negara Malaysia (BNM), the central bank, will help us to analyse its impact on the economy.
We will use the AD-AS model to analyse the impacts of monetary and fiscal policy of the country. These models give a clear picture of the consequences of these measures on the output (Real GDP), inflation and unemployment of the economy.
The outbreak of coronavirus pandemic has affected the economy adversely. The shutdown of factories and industries due to lockdown has led to fall in the supply of goods and services in the economy. This led to fall in the consumer confidence and a simultaneous fall in the demand in the economy. Businesses have also lost confidence and thus, there is a fall in the investment by them. The shut down of factories and to cut their cost, the businesses are laying off their employees. The shortage of the goods and services in the economy has led to rise in the prices. The unemployment rate is increasing in the Malaysian economy. The growth of the economy has been adversely hit by this pandemic.
Fiscal policy can be defined as the government spending and taxation policies to control the economy. In order to stop the economy to enter recession, the government of Malaysia has taken sizable measures equivalent to about 17% of the GDP. The government introduced bank guarantees, loan moratoriums and other measures that were mainly directed to ease the supply of credits by providing monetary support. However, these were not ral spending by the government. It was estimated that the real spending accounted of only 3.3% of GDP.
The fiscal policy by the government was to boost the economy and increase the consumer confidence in the economy. This can lead to increase in the spending by the consumers, investments by the businesses, which will further lead to growth in the GDP of the country.
The article also highlights the steps taken by the central bank of the country to pump money supply in the economy. The central bank uses monetary policy to increase or decrease the money supply in the economy. Bank Negara Malaysia (BNM), the central bank took various measures like cut in the overnight policy rate, lowered the Statutory Liquidity Ratio (SLR) to increase the money supply in the economy.
The monetary policy used by the central bank was expansionary monetary policy. Expansionary monetary policy was aimed to increase the flow of cheaper credits in the market. This can increase the disposable income available to people in the economy which will further increase the output and employment of the economy.
The diagram below explains the change in the output and prices due to fiscal policy by the Malaysian government. The expansionary fiscal policy by the government will increase the aggregate demand curve towards the right. The output increases from Q1 to Q2 and the price also rises from P1 to P2.
Sarkodie, S.A. and Owusu, P.A., 2020. Global assessment of environment, health and economic impact of the novel coronavirus (COVID-19). Environment, Development and Sustainability, pp.1-11.
hah, A.U.M., Safri, S.N.A., Thevadas, R., Noordin, N.K., Abd Rahman, A., Sekawi, Z., Ideris, A. and Sultan, M.T.H., 2020. COVID-19 Outbreak in Malaysia: Actions Taken by the Malaysian Government. International Journal of Infectious Diseases.
Sarker, P., 2020. COVID Crisis: Fiscal, Monetary and Macro-financial Policy Responses. Monetary and Macro-financial Policy Responses (May 8, 2020).
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