İKTİSADA GİRİŞ II - Deneme Sınavı - 11

An expansionary monetary policy shifts aggregate demand curve to right and causes equilibrium price level and output to increase.

The expenditure components that affect the change in the aggregate expenditure function in the economy also cause the aggregate demand curve to shift as well. Assume that the aggregate supply curve is constant, the aggregate demand curve shifted to the right for any reason. Eventually, the general price level in the economy increases, while the equilibrium income level increases. This increase
(or sometimes decrease) in aggregate demand is called as aggregate demand shock.

The expenditure components that affect the change in the aggregate expenditure function in the economy also cause the aggregate demand curve to shift as well. Assume that the aggregate supply curve is constant, the aggregate demand curve shifted to the right for any reason. Eventually, the general price level in the economy increases, while the equilibrium income level increases. This increase
(or sometimes decrease) in aggregate demand is called as aggregate demand shock.

The economic policy is influential on aggregate demand, as it is contractionary or expansionary. When the fiscal policy is applied, the tools used are the government expenditure (G) and the taxes (T), while the money supply (MS) used in the monetary policy. An expanding economic policy is to stimulate the economy by increasing the aggregate demand. We have shown that this goal can be achieved with an increase in government spending or with an increase in money supply and a reduction in taxation. The goal of a contractionary economic policy is to reduce aggregate demand and slow down economic activity.

Stagflation is the situation in which prices increase while production decreases.

The rise in prices increases the demand for money.  At the initial interest rate, the increase in prices will create an excess demand for money in markets. Economic agents will want to hold more money because of increasing prices. Since we assumed  that money supply is constant, money market can only reach an equilibrium at a higher interest rate.

The decline in prices will reduce the demand for money and lead to a decline in equilibrium interest rates. A lower interest rate will increase planned investment expenditures and therefore aggregate expenditures. Firms experiencing a decrease in stocks will increase their production. As a result, the decline in overall prices (P↓) leads to an increase in production (Y↑).

The increase in government expenditures (or the decline in tax rates) causes the AD
curve to shift to the right. As a result, as price level remains the same, production level increases.

An increase in taxes causes aggregate demand curve shifts to the left. As a result, while price level stays the same, produciton level decreases.

If the price of an input used by the firm increases, the firm responds by increasing the price of the manufactured goods and decreasing the production. The effect of this
increase in costs for the whole economy is explained by the shift of the AS curve to the left. At a given production level, the shift of the AS curve to the left means a higher price level.

As production increases, the price of capital and labor will start to increase more rapidly, which will lead companies to increase their prices. This portion of AS curve is called as intermediate region.

An increase/decrease in costs creates a shift in AS curve. A change in government expenditures or taxes will cause a shift in AD curve. Change in prices will create a movement along the curve.

An increase/decrease in costs creates a shift in AS curve. A change in government expenditures or taxes will cause a shift in AD curve. Change in prices will create a movement along the curve.

Assume that the aggregate supply curve is constant, the aggregate demand curve shifted to the right for any reason. As a result, the aggregate demand curve shifts to the right. 
Eventually, the general price level in the economy increases while the equilibrium
income level increases.

If governmetn wants to achieve a significant increase in production despite a
small increase in the general price level, an expansionary policy (cause a shift in the AD curve to the right) should be realized where AS curve is flatter.

AGGREGATE DEMAND

Aggregate demand is the total amount of goods and services demanded at various price levels by all sectors in an economy (households, firms, government, and external world). The total amount of these goods and services is measured by real income or real GDP. As you will recall, the general level of prices is expressed by the average weighted index of prices of all goods and services in the economy. For example, the consumer price index (CPI) we are familiar with from our daily lives is an index that measures the change in the general level of prices. In this sense, aggregate demand explains the relationship between the general level of prices and the real income.

Aggregate Demand Curve

The aggregate demand curve is the curve showing the relationship between the general price level and the level of production. There is an inverse relationship between prices and production (real income). The inverse relationship between total production (real income) and the general level of prices is called the aggregate demand curve (AD).

Shifts in Aggregate Demand Curve

In obtaining the aggregate demand curve, we have assumed that the variables of the economic policy that the government use are fixed. Changes resulting from government expenditure (G), taxation (T) and money supply (MS) due to monetary and fiscal policy decisions cause the aggregate demand curve to shift.

MS goes up=> AD shifts to the right

MS goes down => AD shifts to the left

G increases=> AD shifts to the right

T reduces=> AD shifts to the right

G decreases => AD shifts to the left

T goes up=>AD shifts to the left

Short-run Aggregate Supply Curve

There are different approaches among economists regarding the shape of the short-run aggregate supply curve, in other words, the slope of the short-run aggregate supply curve. Classical economists argue that the short-run supply curve is completely vertical or rather steep because the economy is always at full of employment as a result of dynamics of the market mechanism. According to this view, since the economy is in full employment, it is not possible to increase the total output even in the short-run. Keynesian economists argue that the supply curve is horizontal because the economy is underemployment GDP level. According to this view, it is possible to increase the total production without changing the general price level. When the economy moves from underemployment to full employment due to the increase in production, the general price level will start to rise. In this region where the elasticity of the short-run aggregate supply curve begins to decrease, the supply curve will have a positive slope.

Short-run Aggregate Supply Curve

There are different approaches among economists regarding the shape of the short-run aggregate supply curve, in other words, the slope of the short-run aggregate supply curve. Classical economists argue that the short-run supply curve is completely vertical or rather steep because the economy is always at full of employment as a result of dynamics of the market mechanism. According to this view, since the economy is in full employment, it is not possible to increase the total output even in the short-run. Keynesian economists argue that the supply curve is horizontal because the economy is underemployment GDP level. According to this view, it is possible to increase the total production without changing the general price level. When the economy moves from underemployment to full employment due to the increase in production, the general price level will start to rise. In this region where the elasticity of the short-run aggregate supply curve begins to decrease, the supply curve will have a positive slope.