BNM confident of 5-6pc GDP growth this year.

QUESTION 1

What are the factor can contribute to our economic growth and give examples?

Economic growth refers the long-tem expansion in the productive potention of

the economy as there a positive impact towards the gross domestic product and
national income.This can be as the indicator towards the economic to be have a
sustained living standard of the country.Hence, there is a factor that will be influence
the economic growth especially in Malaysia.

First, social factor as the one of the significant role in economic growth.The
social factor refers the how the country would be as important things in surrounding
as the country has many culture,traditions and values the contribute to the growth of
an economy.An examples,a society with conventional beliefs and very resists with the
adoption modern ways of living.

Second, the capital formation also be one of the important factor as the country
need to producing and accuring the product as there are the capital.The capital would
be increase the availability on the export the commodities.As there also can increase
the productivity of the labor and can sustain the output towards the economic growth.

Third,technological development also one of part factors most affect towards

economic growth.An examples,the countries can easily to communicate with
nationwide and can be improve in productivity of the labors.The production of good
and services would be optimal with the kind of machines.

Forth,natural resources can be affect the economic growth to a large extent.This

would be improved the economic by the natural resources includes plants or water.For
examples

Then,to achieving the sustainable economy becomes difficult.However,the

political factors as the participation of the government to implement their roles and
policies toward economy
QUESTION 2

The increases of interest rate may consider as the risk to growth,why?

The increase interest rate would be consider as the risk to growth this as stated it
will be predicted to rise above their inflation target.Since the higher interest rate tend
yo moderate the economic growth.As the increase of cost borrowing it also would be
impact on reduce disposable income and it has limitation towards the consumer
spending.

The increase of the interest rates would be affect the increases the cost of
borrowing. This can be mentioned as the higher interest rates, interest payments on
credit cards and loans are more expensive. Therefore,it will be an impact towards
discourages people from borrowing and spending.This is because the people who
already have loans will have less disposable income because they spend more on
interest payments. Then,the expected of returns on loans would be lower.

Moreover, the increase in mortgage interest payments as the one of impact on the
increases the interest rate .This can be related as the interest payments on variable
mortgages will increase. The increase of interest rates would be an incentive to save
rather than spend. The higher interest rates make it more attractive to save in a deposit
account because of the interest gained.

In addition,the higher interest rates increase the value of a currency.This can be

affect by reducing exports and increasing imports. Hence,the currency would be
increase and it can be effect of reducing aggregate demand in the economy.The
consumer and firm would be burden of the currency value increase and it has
experience fall in consumption and investment.

Then,the overnment debt interest payments increase. The higher interest rates
increase the cost of government interest payments. This could lead to higher taxes in
the future.However,interest rates affect consumer and business confidence. A rise in
interest rates discourages investment; it makes firms and consumers less willing to
take out risky investments and purchases.
QUESTION 3

“If the government increase the SRR in key lead to inflation.”Comment this
statement.

As there economist predict that BNM wuill rise the SRR , this can lead towards
inflation because of the hikes in Malaysia’s statutory reserve requirement (SRR) as at
1% which would be risk to growth and inflation.The SRR is the minimum amount
commercial banks must deposit with the central bank compared with what there hold
in deposits and notes.

Moreover, the SRR was one of several instruments available that could be used to
manage liquidity.This can be refers based on the assessment of the monetary policy
on what the risk to inflation and balance againts the risk to growth.The central banks
in the region have tightened monetary policy through the hikes in the reserve
requirement and key commercial lending rates as the one of emerging market asset
prices rose and inflation surged due to higher commodity prices.

Overall, the SRR will affect intermediation cost which is will usually influence
lending growth.The SRR are likely to be ineffective in the short run if the main causes
are due to external shocks.The open economy in which the inflation are strongly
affected bt the long run.There is the growth of country on supply productive potential
that gives an economy the flexibility to grow without suffering from accelaration in
cost and price inflation.

The SRR is a requirement by BNM for all banks to deposit a certain percentage
of their loan assets with BNM at 0% interest rates. The idea is that the SRR regulates
the amount of liquidity that the banking system can use to extend loans to customers.
Since credit is the primary form of money creation in the economy, a higher SRR also
reduces the capability of the banking system to create money.
Question 4

Explain the monetary tools that can be use by the BNM to combat inflation and
unemployment.

Bank Negara Malaysia announces today the implementation of a number of

policy measures. These measures aim to improve the efficiency of the intermediation
process in providing financing to productive economic activities as well as to enhance
the efficiency of the operations of the money market to allow interest rates to reflect
underlying liquidity conditions. These measures also aim to reinforce the fundamental
trust of policy to achieve the objectives of monetary and financial stability.

However,monetary policy has been tightened progressively through a

combination of interest rate policy, prudential measures and quantitative restrictions.
It can be measures to ensure that any downward trend in asset prices would not
threaten the strength and stability of the financial institutions in particular and the
financial system in general. The measures are also aimed at encouraging available
financial resources to be channelled for productive activities. While these measures
have contained lending to the property and share markets, overall lending growth
continued to remain high.

Hence,these measures were strengthened further with credit plans which are
aimed at slowing down the overall credit growth to levels that are more consistent
with the growth in economic activities. At the same time, several prudential
regulatory measures were introduced to further strengthen individual banking
institutions. These measures include more strighten disclosure requirements, higher
general provisions and a shorter period for recognising non-performing loans.

Moreover, the above policy measures have been effective in slowing down the
growth of credit and money supply some inefficiencies have emerged in the
intermediation process as well as in the functioning of the money market.Then,it can
improve the efficiency of the intermediation process in terms of greater reliance on
the market mechanism to facilitate access to funding and facilities to support more
productive activities.