İKTİSADA GİRİŞ II

Classical economists accept that aggregate supply curve is vertical because the economy is always at fullemployment.

Acording to Keynesian economists, aggregate supply curve is horizontal when the economy is in underemployment.

When aggregate demand is equal to aggregate supply, the equilibrium price level is achieved.

Since an increase in Money supply shifts the aggregate demand curve to right, both price level and output incerease.

Since a drought causes aggregate supply curve to shift to left, price level increaes while output decreaes.

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.