Macroeconomic Policy Analysis Report - Semester March 2020

This report provides a macroeconomic policy analysis of Malaysia's economic situation in response to the coronavirus pandemic. It begins with an introduction summarizing the article's key points, including the predicted economic contraction and the government's response. The analysis section uses the Aggregate Demand-Aggregate Supply (AD-AS) model and discusses monetary policy, particularly the use of Open Market Operations (OMO) to cut interest rates and stimulate the economy. The report explains the impact of expansionary monetary policy on aggregate demand, price levels, and output. The conclusion highlights the adverse effects of the pandemic on Malaysia's economy and suggests that the government use expansionary fiscal policy to support the monetary policy. The report includes diagrams illustrating the impact of OMO and expansionary monetary policy and provides references to the sources used.

Running head: MACROECNOMIC POLICY ANALYSIS
Macroeconomic Policy Analysis
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Table of Contents
Article: Malaysia's central bank says economy could shrink in 2020 due to coronavirus..............3
Introduction......................................................................................................................................4
Analysis...........................................................................................................................................4
Conclusion and suggestions.............................................................................................................5
Diagram...........................................................................................................................................6
Reference.........................................................................................................................................7

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Article: Malaysia's central bank says economy could shrink in 2020 due to coronavirus
Malaysia’s central bank said on Friday the economy could shrink by as much as 2% or
grow 0.5% this year due to the coronavirus pandemic, in what would be its worst economic
performance in more than a decade.
Malaysia, which has the highest number of reported coronavirus infections in Southeast
Asia with more than 3,100 cases and 50 deaths, is in the middle of month-long restrictions on
travel and non-essential business that have hit trade and tourism.
“We are mindful that the situation surrounding COVID-19 is highly fluid and the
situation is constantly shifting,” Bank Negara Malaysia’s (BNM) governor, Nor Shamsiah Mohd
Yunus, told a virtual news conference, referring to the disease caused by the coronavirus.
“The GDP forecast... is our best estimate based on what we know today. Great
uncertainty remains.”
Nor Shamsiah said the economy, nevertheless, would be supported by the government’s
stimulus measures and the bank’s policy rate cuts.
She said the bank’s monetary policy stance remained accommodative and that it could
deploy “policy levers” to cushion the impact of the virus. Its next monetary policy meeting is due
on May 5.
BNM said Malaysia’s goods and services exports could slump 8.7% this year as its key
customers get hammered by the pandemic. Exports dipped 0.8% last year.
Southeast Asia’s third-largest economy last reported economic growth below zero in
2009 due to the global financial crisis. The economy grew 4.3% last year.
The World Bank has forecast that Malaysia’s economy would contract 0.1% this year.
BNM said inflation was expected to average between -1.5% and 0.5% in 2020, lower than last
year’s 0.7%.
It said monetary operations would continue to support liquidity in the foreign exchange,
bond and money markets.
“The bank will ensure uninterrupted financial intermediation in the environment of
heightened financial market volatility,” it said.
Separately, index provider FTSE Russell gave Malaysia another six months to improve
market conditions to stay on in the World Government Bond Index.
The bonds were first put on a review for a downgrade in April last year, prompting BNM
to announce measures to enhance liquidity in a bid to avoid a damaging exit from the
benchmark.

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Introduction
The article speaks about the possible contraction of the economy of Malaysia. Bank
Negara Malaysia (BNM) predicted that the economy of the country would slowdown by atleast
2%. The reason for the economic slowdown is coronavirus pandemic. Malaysia is the most
affected Southeast Asian country. This has caused overall economic activities of the country to
fall causing economic slowdown. BNM has assured to cut policy rates or interest rate to boost
the economy. The analysis of the policy of BNM would be analysed by the use of aggregate
demand (AD) and aggregate supply model and monetary policy. AD and AS model is selected
because any movement in economic activities get reflected in this model and the policy used by
BNM is monetary policy.
Analysis
Inn AD-AS model, aggregate demand is the total demand of goods and services in an
economy. Similarly, aggregate supply is the total supply of goods and services. Thus, the model
shows the equilibrium output and price level of a country. On the other hand, monetary policy is
the policy used by the central bank of a country to achieve the target inflation, growth and
consumption by managing interest rate and money supply (Walsh 2017). Monetary policy is a
demand side policy used by the government of a country.
Coronavirus pandemic started in Wuhan city of China in December 2019 and within
three months, it has spread all around the world (Phelan, Katz and Gostin 2020). The pandemic
is impacting both the health of people and health of economy. Like other countries, Malaysia has
patients infected with coronavirus. As on 2nd April, 2020, the patient count infected by the virus
was 3100 and the number of death caused due to the infection was 50. To contain the spread of
the novel coronavirus Malaysia has locked down the country and thus due to restriction over
travel and transport of non-essential products has affected the trade of the country adversely
(Asia Times 2020). With fall in business and other economic activities of the country has slowed
down the economic growth of the country. It is estimated in the article that there will be 0.1%
contraction in the economy of the country. The inflation rate of the country is also very low,
close to zero. The governor of BNM has assured that to deal with the current economic condition
there will be cut in interest rate. To cut interest BNM would implement Open Market Operations
(OMO) under expansionary monetary policy to boost the economy (Ndou and Mokoena 2019).
Expansionary monetary policy is implemented to increase the money supply in the economy.
Therefore, to increase money supply BNM would buy bond and securities from banks and
provide them with money deposit as credits. Thus, with rise in money supply the overnight
interest rate falls. The fall in interest rate will lower the borrowing interest rate. Hence, with fall
in borrowing interest rate the business firms in the market will borrow more money for
investment. With more investment, the firms will hire more employees to increase production.
Consequently, the disposable income of the people will rise. This will lead to increased
consumption and cause the aggregate demand to increase. This would mean that the price level
of the economy will rise causing inflation (Rezai, Taylor and Foley 2018). Along with that the
output of the country will increase too since there will be a rise in quantity of aggregate supply to
meet this upward change in aggregate demand.
In figure1, the mechanism of OMO can be seen. It shows that after BNM buys bond and
securities from banks and credit them with money deposit, the money supply curve MS shifted
rightward to MS1 causing the money supply in the market to rise from Q to Q. As a result, the

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interest rate declined from R to R1. Therefore, by OMO BNM cuts the interest rate to boost the
economy of the country.
In figure 2, the graphical representation of the impact of the above mentioned
expansionary monetary policy is shown. In the figure, the increased change in aggregate demand
due the expansionary monetary policy taken by the BNM has caused the rightward shift of the
AD curve from AD to AD*. This movement has occurred along the AS curve (Piffer 2018). Due
to shift of AD curve, it can be seen that the price level has increased from P to P*. With more
consumption demand, the business confidence will increase and there will be more supply of
goods. As a result, the out of the country will increase from Y to Y*. Therefore, with the help of
the policy the economy of the country will expand and thus there will increase in economic
growth of Malaysia.
Conclusion and suggestions
The above analysis of the article leads to the conclusion that the economy of Malaysia is
adversely affected by the coronavirus pandemic. The pandemic has forced the country to
lockdown its borders and restricted any kind of unnecessary travel and movements. This has
affected the business activities and thereby causing economic slowdown. Bank Negara Malaysia
has assured that by cutting interest rate by implementing OMO under expansionary monetary
policy to increase money supply to boost the economy.
Moreover, to boost the economy the government of Malaysia should use expansionary
fiscal policy to boost money supply and support the expansionary monetary policy of BNM to
boost the economic growth. Under expansionary fiscal policy the government should cut tax rate.
Fall in tax rate increases disposable income of individuals and thereby increases consumption
demand. Consequently, aggregate demand would increase and boost the economic growth.

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Diagram
Figure 1: Impact of Open Market Operations on money supply and interest rate.
Source: (Created by the Author)
Figure 2: Impact of expansionary monetary policy on aggregate demand and supply
Source: (Created by the Author)

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Reference
Asia Times., 2020. Covid-19 curve still rises under Malaysian lockdown. Available at:
https://asiatimes.com/2020/03/malaysian-lockdown-cant-curb-covid-19-spread/.
Ndou, E. and Mokoena, T., 2019. Do the Effects of Expansionary Monetary Policy Shocks on
Output Persistence Depend on Inflation Regimes?. In Inequality, Output-Inflation Trade-Off and
Economic Policy Uncertainty (pp. 357-366). Palgrave Macmillan, Cham.
Phelan, A.L., Katz, R. and Gostin, L.O., 2020. The novel coronavirus originating in Wuhan,
China: challenges for global health governance. Jama, 323(8), pp.709-710.
Piffer, M., 2018. Monetary Policy and Defaults in the United States. International Journal of
Central Banking, 14(4), pp.327-358.
Rezai, A., Taylor, L. and Foley, D., 2018. Economic growth, income distribution, and climate
change. Ecological Economics, 146, pp.164-172.
Walsh, C.E., 2017. Monetary theory and policy. MIT press.