(a) During a recession, the government increases spending by RM50 billion, which in turn

increases Real GDP by RM250 billion.

(i) Explain the type of fiscal policy implemented by the government. (5 marks)

(ii) Compute and interpret the value of the government spending multiplier. (5 marks)

(b) Using a relevant diagram, explain how monetary policy could be used to close the inflationary

gap. (8 marks)

(c) Suppose the required reserve ratio is 20%, and Alice deposits RM200 in her checkable account

at MCC bank.

Determine the amount that MCC bank can lend from this initial RM200 deposit. (3 marks)

(d) Explain the effect of a decrease in the discount rate on money supply. (4 marks)

[Total: 25 marks]