İKTİSADA GİRİŞ II - Deneme Sınavı - 10

Each factor affecting the firm’s production decisions causes the AS curve to shift. Some of these factors are cost shocks, economic growth, investment gap, natural factors and war.

Increase in Aggregate Supply

Decrease in Costs

- Decrease in input prices

- Low wage level

Economic Growth

- More capital

- More workforce

- Technological progress

Favorable Weather Conditions

In terms of economic stability, two main objectives emerge in today’s economic policy. These are the stability in prices and the stability in production. Price stability is the situation in which the general price level in the economy either changes very slowly or does not change at all. In today’s world it is generally accepted that a two percent annual increase in price level means prices are stable in the economy. Stability in production (output stability) is the reduction of periodic fluctuations in GDP and maintaining economic growth rate close to the long-term average.

Our goal is to assess the impact of economic policies. When analyzing these effects, we should pay attention to two points about AS curve. First of all, we assume that the AS curve does not change. Secondly, we have to pay attention to what region the economy is on the AS curve because the price and production reaction of the economy will be different accordingly. If the economy is operating in the horizontal part of the aggregate supply curve, as in the beginning, an expansionary policy that causes the AD curve to shift to the right leads to a small increase in prices and a large increase in production.

Inflation is the increase in the general level of prices. According to this definition, every factor that shifts the AD curve to the right and the AS curve to the left cause inflation. However, we should clarify the difference between one-time price increase and continuous increases in prices. Inflation is the continuous increases in the general price level for a long time. When you consider the explanations we made so far, it is possible to say that there will be a lot of factors that create one-time increase in prices. However, most of the economists today accept that the main factor that drives prices to increase continuously is continuously increasing money supply. This shows that whatever the initial reason to increase price level is, inflation occurs only when

increasing money supply accompanies. Therefore, it is generally accepted in economics that inflation is always a monetary phenomenon. After distinguishing one-time price increase and inflation, we can analyze the causes of inflation depending on its basic types.