2020 IB Extended Essays

7 Since GDP is recognised as an economic indicator of how a country is performing. A higher GDP attracts higher foreign investment due to speculations of the currency appreciation given the recent economic performances. (LIOUDIS, 2019) Therefore, a contractionary monetary policy may not be the best decision for the aim of the appreciation of the Turkish Lira, whilst the GDP is already negative. However, based on the law of demand, lower prices attract higher the demand. Therefore a decrease in inflation ( to 1 and The increase in interest rates has decreased the supply of money, hence making the TL more costly as seen in Figure 1. This has caused a shift in aggregate demand(AD) from “ September 2018 to December 2018 , Figure 2" . This can also be seen as Turkey experienced an “8.9%” decrease in consumption and a “12,9%” decreas in business investment. (ALKİN, 2020) Therefore, it can be said that the increase in interest rates has slowed the economy down which can also be seen in Figure 4, as the GDP growth rate before September was “-1.2%” compared to after the policy where the GDP was measured to be “-2.8”. (Trading Economics, 2018). Furthermore, the shift in AD has also lowered the average price level(APL) from ( to 1 , 2 ) showcasing a decrease in inflation in the Turkish economy. This is reinforced by the Inflation table in Figure 3 (Trading Economics, 2018), as the inflation fell from “25.24% to 21.62%” further perpetrating Turkey’s aim of slowing the economy down using contractionary monetary policy with the ulterior motive of appreciating their currency. (Trading Economics, 2018)