Macroeconomics Turkey Case Study 2022

Running head: MACROECONOMICS
Macroeconomics
Name of the Student
Name of the University
Student ID

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Table of Contents
Answer 3..........................................................................................................................................2
Answer 6..........................................................................................................................................3
Answer 4..........................................................................................................................................4
Answer 5..........................................................................................................................................5
Reference.........................................................................................................................................9

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Answer 3
Price level of an economy depends on each and every goods and services traded in an
economy of a country. It is an aggregate representation of prices of all goods and services in an
economy. The quantification of price level in an economy is done by Consumer Price Index
(CPI), which is the weighted average of basket of consumer goods and services. Increase in
value of CPI is called inflation (Baker 2016). Therefore, if any goods and services in a basket
changes then the CPI change too. It can be thus said that price change of any of the goods and
services in the consumer basket would impact the CPI value and thereby the price level would
change too. In this case, the Turkey used to export vegetables to other countries after meeting the
domestic demand for vegetables of the country (Bognanni and Young 2019). Hence, there is no
shortage in supply of vegetables in Turkey. However, due to outbreak of Coronavirus most of the
countries has shut down their international borders to contain the spread of the virus (Jiang and
Wang 2019). Due to these export demand for Turkish vegetables has declined. Therefore, having
no option of exporting the vegetables are made domestically available for sales. Due to this, the
domestic supply of vegetables has increased. As a result, the price of vegetables in the domestic
market declined as per the theory of demand and supply. With fall in price of vegetables the CPI
will fall too since assuming, that price of no other products has changed. Therefore, fall in CPI is
means there is fall in price level of the economy. This can be illustrated with the help of
aggregate demand and supply model. The rise in supply of vegetables in the economy will
increase the aggregate supply of the economy causing AS curve to shift from AS to AS*. As a
result, the output of the economy will rise from Y to Y* as show in figure 1. There is no change
in demand and hence AD curve has not shifted. In the figure with rise in output supply the price
level decreases to P* from P (Shaikh, Shah and Shaikh 2017). Hence, it can be seen that selling

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the vegetables meant for export market in the domestic market would increase supply and
impacted the price level of the economy and causes to decline. Therefore, selling vegetables in
the domestic market causes price level top
fall.
Figure 1: Impact of selling vegetables in domestic market
Source: (Created by the Author)
Answer 6
Inflation rate is percentage increase in price level of goods and services in an economy.
High inflation rate lead to high cost of living and lowers the value of money (Ndou, Gumata and
Tshuma 2019). Hence, with rising inflation rate individuals of an economy think that their
purchasing power is falling even with rise in wage rate. Therefore, the monetary authorities and
the government of a country intervenes in the economy by implementing macroeconomic
policies to cut the inflation rate. The macroeconomic policies that are used are known as fiscal
policy and monetary policy (Bianchi and Ilut 2017). To cut the inflation rate, the economy of a
country required to be contracted. In order to contract the economy contractionary policies

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needed to be implemented. The central bank of country uses contractionary monetary policy to
reduce the money supply in the economy. The policy tool used by the central bank in this case is
open market operations. Under the contractionary monetary policy, the central bank sells bonds
to the commercial banks and reduces the money supply in the economy (Nelson, Pinter and
Theodoridis 2018). The interest in the money market thus rise and the overnight policy rate
increases too. Therefore, with rise in interest rate and fall in money supply individuals of the
economy starts to consume less and thus consumption demand in the economy decreases.
Consequently, the aggregate demand in the economy falls. Hence, with fall in aggregate demand
the price of goods and services in the economy decreases. It is known that with fall in price of
goods and services the CPI decreases. Thus, the price level of the economy decreases. This
would mean that wit implementation of contractionary monetary policy the inflation rate
decreases. On the other hand, government increases tax rate under contractionary fiscal policy to
cut the inflation rate. With rise in tax rate, the disposable income of individuals of a country
decreases and because of that, the consumption demand would fall. With fall in consumption
demand, there will be fall in aggregate demand of the economy and thus price of goods and
services declines. As a result, the price level of the economy falls (Hart 2018). Therefore, it can
be inferred that with fall in price level the inflation rate of the economy declines. Hence, these
polices are used by the monetary authority and the government to cut the inflation rate during the
period of hyperinflation (Alvarez et al. 2019). The government may use cut in government
expenditure to reduce the money supply in the economy and thereby aggregate demand of the
economy falls that lead to the fall in price level and hence inflation of the economy drops (Saeed
2018). Therefore, contractionary tools helps the government to cut the inflation rate as and when
required.

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Answer 4
During periods of recession, the unemployment increases and inflation rate decreases. The main
reason for fall in inflation rate is the decline in income of individuals due to joblessness. Fall in
consumption caused fall in price of goods and services and thus inflation rate of an economy
falls due to unemployment. In the article, it is said that the outbreak of coronavirus may lead to
fall in economic growth of Japan and might push the country into recession. The fall I economic
growth could occur due to fall in consumption of goods and services due fall income causing
from joblessness. Thus, to boost the economy of a country, the central banks often use open
market operations. Under open market operations, the central bank buys bond from the
commercial banks to increase money supply. Interest rate is the price of money. When a person
takes loan from a bank, he or he pays interest rate. With rise interest rate, borrowing falls and
with fall in interest rate, borrowing rises. Alternatively, it can be said that with increase in money
supply interest rate of the economy falls (Dingela and Khobai 2017). On the other hand, official
interest rate is the interest rate at which central banks lend money to the commercial banks.
Therefore, when the official interest is at zero then central bank is lending money to the
commercial banks without taking any money as interest. However, buying of bonds increases
money supply in the commercial banks and they are flooded with large amount of money (Jordan
2019). They would lend this to market economy at lower interest. Even when official interest is
at zero money supply in the economy can be increased buying back bonds which would increase
money supply but lowers interest rate.
Answer 5
According to Fischer equation, inflation rate is the difference between nominal interest
rate and real interest rate. Hence, it can be said that inflation or deflation rate has a relationship

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with the interest rate. Negative inflation is known as deflation. However, interest rate can never
be zero because interest rate is the price charged for loans given by banks. Thus, if interest rate
becomes lower than zero then banks have to pay the borrower for borrowing the money just like
price of commodity. Therefore, it can be said that interest cannot be zero.
Deflation rate is a good for money borrowers or businesses and consumers. Nominal
interest rate is given by the sum of inflation rate and real interest rate (Marthinsen 2017). Thus, if
negative inflation or deflation occurs then nominal interest rate would fall. On the other hand,
real interest would increase. Fall in nominal interest rate means businesses has to pay less for
their investment borrowings. In case, of consumers when deflation occurs price of goods and
services decreases and thus value of money increases. Hence, under this condition, any interest
rate on deposit would bring more money in real terms.
Contrarily, it is being argued that with deflation is more problematic than inflation rate.
This is because the wages of workers rises due to inflationary pressure in general case. Hence, if
the deflation occurs then value of money is increasing causing increment in wages in real terms
even when employers are not increasing wages. This put pressure on the employers and thus they
cut wages. Psychologically, every employee expect to wage hike. It acts as morale booster for
the workers and is directly related to productivity. Therefore, if the wages are reduced due to
deflation then it causes the morale of the workers to fall and thereby productivity of workers fall
(Saez, Schoefer and Seim 2019). This would lead to total fall in productivity of the economy and
hence the economy of country falls and further lead to deflation and it will continue like a
cyclical phase.
This problem of deflation can be solved with inflation rate and interest rate. The fall in
wage rate cause consumption of to fall and thus once an economy reaches deflationary stage it is

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difficult to bring it out of the condition. Hence, the only way to push the economy out of
deflation condition is to increase the disposable income of the individuals such that consumption
increase and thereby price of goods and services increase. Thus, the central bank under
expansionary monetary policy can use open market operations. With buying of bonds, the
interest of borrowing will fall and there will be increase in money supply in the economy. Money
supply will boost the business sector and thus there will be rise in disposable income of
individuals that increase the consumption. Increases in consumption demand would increase the
price of goods and services (Yusuf et al. 2017). Consequently there will be rise price level that
the pull the economy to from deflation to inflation. Apart from monetary policy, expansionary
fiscal policy can also be used to solve the problem of deflation in the economy. The government
can increases spending under expansionary fiscal policy, which would increase money supply in
the economy increases disposable income of the individuals. This would mean that consumption
demand would rise price level would go up causing inflation. However, the government
spending depends on the tax revenue and during this period, increase tax rate cannot be increased
to fund the government spending. Therefore, it can be said that the government has some
limitation in increasing spending. Deflation also restricts expansion of economy because with
rise in economic activities the long run aggregate supply (LRAS) would increase which causes
price level to fall. As a result, more deflation would occur. Hence, a country cannot increase its
LRAS due to deflation.
The real world example of deflation is the deflationary period happened in Japan. The
country took numerous policies to mitigate deflation but it took more than a decade for the
economy of the country to come out of the deflation phase (Grinin and Korotayev 2017). The
case of deflation in Japan justifies the difficulties with deflation discussed above.

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It can be thus inferred that deflation is more problematic for an economy than inflation. It
might increase the real interest rate but fall in wages nullifies the impact and causes fall in
consumption. During deflation, people think that price will be lower in future and thus delay
consumption and creates a vicious cycle of deflation. However, it can be tacked with
macroeconomic factors such as inflation, interest rate and government spending but these have
limitations. Economic growth too aggravates the deflation as increases in LRAS leads to more
deflation. Hence, it can be said that deflation is more difficult to control than inflation.

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Reference
Alvarez, F., Beraja, M., Gonzalez-Rozada, M. and Neumeyer, P.A., 2019. From hyperinflation to
stable prices: Argentina’s evidence on menu cost models. The Quarterly Journal of
Economics, 134(1), pp.451-505.
Baker, D., 2016. Getting Prices Right: Debate Over the Consumer Price Index: Debate Over the
Consumer Price Index. Routledge.
Bianchi, F. and Ilut, C., 2017. Monetary/fiscal policy mix and agents' beliefs. Review of
economic Dynamics, 26, pp.113-139.
Bognanni, M. and Young, T., 2018. An Assessment of the ISM Manufacturing Price Index for
Inflation Forecasting. Economic Commentary, (2018-05).
Dingela, S. and Khobai, H., 2017. Dynamic Impact of Money Supply on Economic Growth in
South Africa. An ARDL Approach.
Grinin, L.E. and Korotayev, A.V., 2017. Inflationary and deflationary trends in the global
economy, or expansion of “the Japanese Disease”. History & mathematics: economy,
demography, culture, and cosmic civilizations. Uchitel, Volgograd, pp.103-134.
Hart, R., 2018. Rebound, directed technological change, and aggregate demand for
energy. Journal of Environmental Economics and Management, 89, pp.218-234.
Jiang, J. and Wang, Y., 2019. Analysis of Influencing Factors of Consumer Price Index in
Chinese Residents Based on VAR Model.
Jordan, J.L., 2019. New challenges for monetary and fiscal policies. International Journal of
Economic Policy Studies, 13(2), pp.275-284.

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Marthinsen, J.E., 2017. International Macroeconomics for Business and Political Leaders (Vol.
1). Taylor & Francis.
Ndou, E., Gumata, N. and Tshuma, M.M., 2019. What Is the Role and Costs of Administered
Prices? Evidence from Monetary Policy Responses to Positive Inflation Shocks. In Exchange
Rate, Second Round Effects and Inflation Processes (pp. 255-269). Palgrave Macmillan, Cham.
Nelson, B., Pinter, G. and Theodoridis, K., 2018. Do contractionary monetary policy shocks
expand shadow banking?. Journal of Applied Econometrics, 33(2), pp.198-211.
Saeed, K., 2018. Can We Unlink Taxation From Public Expenditure?. Available at SSRN
3270506.
Saez, E., Schoefer, B. and Seim, D., 2019. Payroll taxes, firm behavior, and rent sharing:
Evidence from a young workers' tax cut in Sweden. American Economic Review, 109(5),
pp.1717-63.
Shaikh, M., Shah, A.B. and Shaikh, F.M., 2017. Effect of Aggregate Demand and Supply Shocks
on Output and Inflation Rate in Pakistan. International Journal of Case Studies, 6(3).
Yusuf, H.A., Owuru, J.E., Akanbi, S.B. and Musibau, H.O., 2017. Interest Rate and Private
Consumption Behaviour in Nigeria: Some Empirical Evidences. Bus Eco J, 8(311), p.2.

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