QUESTION ONE (10 marks)

Suppose that the Central Bank is able to target real GDP when there is instability in either commodity demand or the demand for money. Explain how the Central Bank must conduct open market operations, as

(i) commodity demand rises

(ii) the demand for money increases

QUESTION TWO

a)Explain the evolution of Endogenous Growth theory and how this theory explains technological progress endogenously as opposed to being an exogenous factor according to Solow model.(5 marks)

b)Explain what is the "Solow residual". Discuss, how it is used to account for the long-term improvement in output per person in Malaysia. (5 marks)

QUESTION THREE

a) Define Aggregate Demand and explain TWO (2) factors why the AD curve is a negative slope. (5 marks)

b) Explain what is supply-side policy and how this policy can improve the economy. (5 marks)

QUESTION FOUR

a)What is supply shock? Using the AD-AS diagram show the effect of a positive supply shock on the economy.(5 marks)

b)What costs are associated with perfectly anticipated inflation? Do these costs change as the rate of inflation changes?(5 marks)