2020 IB Extended Essays

The use of a contractionary demand side policy lowers the factors of GDP hence shifting the aggregate demand curve from " 2018 to December 2018 " as seen in Figure 10. This shift has led to a “12.5%” decrease in business investment, and a “0.41%” increase in consumer consumption. When contrasted to Turkey, the business investment value is only “0.4%” lower. However, although a contractionary demand side policy would lower consumption via the law of demand. This was not the case for the UK, they have witnessed an increase in domestic consumption(0.41%) within the economy. Taking these results into consideration, the shift in the aggregate demand curve is mild compared to Turkey’s shift in AD as contrasted in Figures 2 and 10. This can also be supported by GDP figures.(Trading Economics, 2018). Turkey had “0.8%” larger decrease in GDP compared to the UK as seen in Figures 3 and 12. As mentioned in the previous analysis of Turkey’s interest rate change, GDP directly impacts currency value through(X-M), and therefore Turkey would ultimately experience a potentially larger appreciation in currency compared to the UK.(ceteris paribus) Furthermore, the change in the factors of GDP has also lowered the Average Price Level for the UK. The APL shifted from ( to 1 ) showcasing a decrease in inflation. As seen in Figure 2 the shift in APL for Turkey is relatively larger when compared to Figure 10(UK). This can also be seen when Figures 3 and 11 are contrasted; the quarter before the policy, Turkey’s inflation was “25.24%” and the UK’s was “2.7%”. After the policy was implemented, Turkey had an inflation of “21.62%” and the UK had and inflation rate of “2.4%”. (Trading Economics, 2018) Therefore, Turkey lowered its inflation rate more by “3.62%” compared to the UK who decreased their inflation by “0.3%”. As a result, based on the inflation values it can be noted Turkey would experience a greater extent of currency appreciation compared to the UK.

Figure 13: Trade Balance for UK 2018

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