2020 IB Extended Essays

BODY:

- Analysis of Turkey’s Contractionary Monetary Policy:

Since monetary policy is a demand side policy, a rise in interest rates would directly impact the factors of aggregate demand; consumption, investment, government spending, exports, and imports. (Jocelyn Blink, 2012) These factors also make up the formula for Gross Domestic Product(GDP). The “6.25%” increase in interest rates would make Lira more expensive in the Turkish economy hence lowering the factors of aggregate demand ultimately slowing the economy down. Therefore, this policy can be recognised as a contractionary monetary policy. (Economics Beta, 2016) The impact of the increase in interest rates can be seen in Figure 1 below.

An increase in interest rates would subtract money out of the economy, hence 7.25% increase has shifted the supply of Turkish Lira(TL) from S1 to S2 as seen in the graph above. This can also be seen as the quantity of TL decreased from Q1 to Q2, which has resulted an in increase in Price, “P1 to P2” as seen in Figure 1 above. This represents how money became more expensive to borrow in the Turkish economy hence, impacting the factors of GDP (Jocelyn Blink, 2012), which is explained in Figures 2, 3 and 4 below.

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