Question 2

(a) Economists have calculated that the natural rate of unemployment for country A is 4.5%. Due to the Movement Control Order (MCO) which was implemented by the government in response to the COVID-19 pandemic, the unemployment rate increased to 12% in 2020. Identify and explain the type of unemployment experienced by country A. (4 marks)

(b) The table below shows country Z's economic performance for year 2020:

Natural Real GDP RM300 million

Equilibrium Real GDP RM450 million

Based on the information above,

(i) Draw a diagram to illustrate the state of the economy. (5 marks)

(ii) If resource prices are flexible, explain how the economy would reestablish itself from a short-run equilibrium to a long-run equilibrium. (6 marks)

(c) With the aid of aggregate demand and short-run aggregate supply (AD-SRAS) diagrams, describe the effects on the equilibrium price level and Real GDP for each of the following events:

(i) The Malaysian government announced to lower the rate of individual income tax by one percentage point. (5 marks)

(ii) An upward price pressure for key raw materials due to reduction in raw materials supplied from China. (5 marks)

[Total: 25 marks]