Introduction to Economics 2 Dersi 6. Ünite Sorularla Öğrenelim

What is ''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).

What is ''aggregate demand curve''?

Aggregate demand curve is the curve that shows the relationship between general price level and production level.

In order to obtain the aggregate demand curve, we should examine how the quantity of production responds to the price level changes. In other words, we should find an answer for some questions.What are they?

“When prices increase,
 what is going to happen to the quantity of production?
 Increase, decrease or unchanged?”

What does an increase in government expenditure or a reduction in taxes lead to ?

An increase in government expenditure or a reduction in taxes leads to an increase in production (real income) at each price level.

What is ''aggregate supply''?

Aggregate supply is the total amount of goods and services produced at various
price levels in an economy.

What is ''aggregate supply curve''?

Aggregate supply curve is the curve showing the relation between the total amount of production and prices offered by all firms in an economy.

Why do classical economists argue that the short-run supply curve is completely vertical or rather steep?

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.

What is ''equilibrium price level''?

Equilibrium price level is the price level at which the aggregate demand is equal to aggregate supply.

What is''price stability''?

Price stability is the situation in which the general price level in the economy either changes very slowly or does not change at all.

What is ''production stability''?

Production stability is to reduce the periodic fluctuations in GDP and maintaining economic growth rate close to the long-term average.

Why are the two aims (Price stability and Production stability) complementary?

The two aims are complementary because they have close interactions with each other. According to the so-called divine coincidence in economics literature, output stability is provided automatically in an economy where price stability is provided.

Why is the economic policy is influential on aggregate demand?

The economic policy is influential on aggregate demand, as it is contractionary or expansionary.

Our goal is to assess the impact of economic policies. When analyzing these effects, we should pay attention to two points about AS curve.What are they?

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.

What is ''Inflation''?

Inflation is the continuous increases in general price level for a long time.

What is''Cost-push inflation'' ?

Cost-push inflation is the inflation that occurs as a result of increase in input costs.

Why is it generally accepted in economics that inflation is always a monetary phenomenon?

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.

What is ''Demand-pull inflation''?

Demand-pull inflation is the inflation caused by aggregate demand increases.

What is ''Stagflation''?

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

What plays an important role in the emergence of demand-pull inflation as well as the consistent inflation?

The increase in the money supply plays an important role in the emergence of demand-pull inflation as well as the consistent inflation.

The increase in the price level leads to an increase in the demand for money.  If the supply of money is constant, increase in money demand will increase interest rates in the money market. An increase in the interest rate will result in a reduction in planned investment expenditures.

What does this new emerging equilibrium position in the economy correspond to?  

This new emerging equilibrium position in the economy corresponds to

-high government expenditures,

-low investment expenditures,

-higher interest rate and

-increasing price level.