İKTİSADA GİRİŞ II

The aggregate demand curve is the curve showing the relationship between the general price level and the level of production. In order to obtain the aggregate demand curve, we should examine how the quantity of production responds to the price level changes.

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.

An increase in government expenditure or a reduction in taxes leads to an increase in production (real income) at each price level. The increase in government expenditures directly leads to an increase in the amount of production by increasing aggregate expenditures. A decrease in taxes leads to an increase in disposable income and an increase in consumption expenditures, leading to an increase in aggregate expenditures and an increase in production. Therefore, the increase in government expenditures or the decline in tax rates causes the AD curve to shift to the right.

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.

In the economy, changes in costs may occur regardless of the price level. For example, an increase in oil prices is a good example. Oil is an important input for many firms and sectors. If the price of this 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.

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

The total amount of good and services produced in a economy is measıredby using real GDP.

Interest rate is the key element in monetary tranmission mechanism t obtain negaively slopped aggregate demand curve.

An increase in government expenditures causes the aggregate demand curve to shift right.

Aggregate supply curve represents the relationship between prices and output.