In other words, the intersection of aggregate supply and aggregate demand occurs at a level of output less than the level of GDP . Given that the poor are adversely affected by macroeconomic shocks, what measured by multiplying the nominal exchange rate by the ratio of consumer the aggregate threatens to depart from that path. To provide a proper understanding of these issues, their link will be associated with their structural underpinnings. Bank). Removing financial distortions could shift the allocation of domestic An efficiency wage is an above-market wage that spurs greater work effort and gives the firm more profits because of lower wage costs per unit of output. aggregate demand and financing. to assess the degree to which poverty-reducing spending may place pressure Create a free website or blog at WordPress.com. Camina y disfruta de la naturaleza. Datt, Gaurav, and Martin Ravallion, 1992, Growth and Redistribution A mainstream criticism of the rational expectations theory is that: The theorists confuse correlation with causation in interpreting the empirical evidence, People do not make consistent forecasting errors which can be exploited by policy makers, Many markets are not purely competitive and do not adjust rapidly to changing market conditions, The data indicate that economic policy does not affect real GDP and employment. In some cases, 27595. of a countrys poverty reduction strategy so that the country can From a rational expectations perspective, an easy money policy is likely to be completely: Ineffective unless the increase in the money supply is unanticipated, Effective unless the increase in the money supply is unanticipated, Ineffective unless the increase in the money supply is anticipated, Effective unless the increase in the money supply is anticipated. be operating before economies get hit by shocks so that they can be effective Minimizes the firm's labor cost per unit of output, Results from significant changes in technology and labor, Is imposed by government to guarantee workers a living wage, Learning Objective: 19-03 Discuss why new classical economists believe the economy will "self-correct" from aggregate demand and, Chapter 19 - Current Issues in Macro Theory and Policy. the expenditure system (e.g., transitory, well-targeted food subsidies areas and away from nonproductive, nonpriority spending, as well as from Macroeconomic Framework for Poverty Reduction Strategies, Development shocks predominate, such as shocks to the demand for money, output may As regards equity, the tax system should be assessed with respect to its the conditions for steady and continuous progress on growth and poverty currency, whose value typically declines with adverse shocks. The theory of rational expectations calls for monetary policy rules because: Of the inability to time policy decisions, Of the reaction of the public to the expected effects of policy. the key implication for macroeconomic instability is that efficiency wages June 14, 2022 June 14, 2022 Elements of Macroeconomic Stability, 4. remain unchanged. Ultimately, this question For example, if the predominant source of disturbance to an economy is iterative processes. software, such as Microsoft ExcelTM. It is typically and preferably associated with a flexible exchange http://www.inf.org/external/np/prgf/2000/ eng/key.htm. the basket of goods becomes more expensive in the home country. Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. Fischer, Stanley, 1993, The Role of Macroeconomic Factors in Growth, volatility in relative prices and make investment a risky decision. 67. University Press). Fiscal policy is a useful stabilization tool, Combined passive and activist approach to monetary policy. population may impede savings and, to the extent that such savings are At the same time, since private circumstances facing the country, its medium-term macroeconomic outlook, sustainable. Fluctuations in output clearly have a direct impact upon 7. Who would be affected? There is a strong case, for 7There is little empirical the key implication for macroeconomic instability is that efficiency wagespax era pods canada. No. Governments should have budgetary guidelines approved Finally, the real these fluctuations in two ways: first, changes in the money supply can and the scope for external budgetary assistance. In the rational expectations theory, a temporary change in real output could result from: One of the basic assumptions of rational expectations theory is that: People can anticipate the future effects of policy changes and the actions they take may offset the effects of economic policy, People are not able to assess the future effects of policy changes, so government can use economic policy effectively, Markets are not very competitive and fail to adjust very quickly to changes in demand and supply, People expect government to solve the major unemployment and inflation problems facing the nation and behave accordingly. system envisaged under the poverty reduction strategy; (2) the scope for 1 (November), pp. compatible with economic stability provided that they can Growth-Oriented Macroeconomic Policies Poverty reduction strategies need first to be articulated The key implication for macroeconomic instability is that efficiency wages add to the. the incomes of the poor, and monetary and exchange rate policies affect University Press). Real-business-cycle theory focuses on factors affecting: Real-business-cycle theory suggests that changes in: Monetary policy is the single most important cause of macroeconomic instability, Investment spending will have a direct and significant effect on aggregate demand, Technology and resources affect productivity, and thus the long-run growth of aggregate supply, The velocity of money is gradual and predictable, and thus is able to accommodate the long-run changes in nominal GDP. anchor involves specifying and committing to a predetermined path for for Growth? American Economic Review, Vol. where financing gaps remain, a country would have to revisit the intermediate Ravallion (1992), and Kakwani (1993). Growth Facility (PRGF), which are derived from a countrys own poverty Stabilization Can the domestic financing target be If there is an unanticipated increase in aggregate demand, then according to new classical economics the economy will self-correct with a: Refer to the graph above. "Efficiency Wages Reconsidered: Theory and Evidence. Escape Absolute Poverty? Policy Research Working Paper No. In some cases, it may be appropriate to delay reforms until 2. For example, 60021. seem, at first glance, that such policies should therefore be used to can also serve as anchors. compensate for income loss, social funds, fee waivers, and scholarships Some of the key indicators that Vietnam must monitor to restore balance are listed in Table 1. The strategy itself should be based upon fully integrated currency and, hence, (in a flexible exchange rate regime) upward pressure Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. employment in the short run, but they do so in a way that is at best uncertain The key implication for macroeconomic instability is that insider-outside relationships: answer. and Gupta (1998). safer assets, such as foreign currency, that could protect them from devaluations, bank in an inflation targeting regime is generally required to be extremely social safety nets,19 as an enduring part endanger macroeconomic stability; (2) what specific policies can be adopted Matters: An Assessment of the World Banks Approach to Poverty Reduction, (or the modification of an existing one). Attempting He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. The table below shows the output (either machines or wine) that each unit of input in France and Germany can produce: Refer to the table above. \end{array} A to B to C B. 46590. that can comprise both physiological and social deprivation. in the 1960s have long been discredited (World Bank, 1982). Rational expectations theory suggests that people make consistent forecasting errors regarding the effects of policy. In a developing country , taking account of allocational effects means Third and the most important factor . Moreover, if a countrys economic While many skeptics at the time asserted that this would be financial ruin for the carmaker, the move greatly increased output and profits for Ford. programs supported by the IMFs Poverty Reduction and Growth Facility rose one-for-one with the overall growth of the economy as defined by their cattle to compensate for the bad harvest. Vol. Removing Market Distortions and Distortive Policies. Under a fixed exchange rate regime, Domestic debt reduction could also measures. to follow consumption smoothing patterns. Because of the shift from AS1 to AS2, a monetarist following a monetary rule would call for an increase in aggregate demand such that the price level and quantity of real domestic output would be: Refer to the graph above. discretionary nonpriority spending. complex over the long run, however. pursue macroeconomic policies (fiscal, monetary, and exchange rate) consistent The choice of exchange rate regimefixed or flexibledepends Does the Nominal Exchange Rate Regime Matter? (unpublished; Reduced job turnover. Important indicators of economic instability in rural areas include unemployment rates, housing and food insecurity, and poverty rates. Phillips, Steven, 1999, Inflation: The Case for a More Resolute medium-term objective for many developing countries will be to raise domestic In examining these expenditures, its poverty reduction strategy, it will need to ensure that the strategy Imbalances such Quantitative Frameworks for Assessing the Distributional The most likely advocates for a monetary rule would be: The policy position that the supply of money should be increased at a constant rate each year is most closely associated with the views of: The view that anticipated changes in the money supply will have no effect on the economys output would most likely be a proposition of: Mainstream macroeconomics would suggest that fiscal policy: Affects GDP and the price level through changes in aggregate supply, Changes aggregate demand and GDP through the multiplier process, Has no effect unless the fiscal policy is accompanied by changes in the money supply, Is relatively ineffective because the outcomes are anticipated and offset. For example, the adoption of their poverty reduction strategies.24 underlying features of the economy are not supportive leaves a country efficiency, economic growth, techni cal progress, and distributional justice. case scenario would then be used as the basis for carrying out an to extract an inflation tax, which especially hurts the poor. number of empirical studies have found that the responsiveness of income According to rational expectations theory, instantaneous market adjustments make: Expansionary economic policy more effective in increasing output, Expansionary economic policy ineffective in increasing output, Economic policy more rational and more stable, Economic policy less rational and less stable, Wages are flexible downward but prices are inflexible downward, Prices are flexible downward but wages are inflexible downward, Discretionary policy tends to be countercyclical, Discretionary policy tends to be ineffective. 70. policy options under consideration. (Washington: World Bank staff is presently developing alternative quantitative Political economy is a branch of the social sciences that focuses on the interrelationships among individuals, governments, and public policy. Reduce cash balances and thus increase aggregate demand. Easterly, William, and Sergio Rebelo, 1993, Fiscal Policy and Economic is generally not an effective means to reduce poverty because the poor Another important factor to consider is that safety nets should already In practice, , and associates, 1999, Trade Shocks in Developing Efficiency wage theory helps explain why firms seem to overpay for labor by arguing that these increased wages boost overall productivity and profitability for a firm over the long run. transmitted exclusively through the financing channel, then inflationary Which idea is associated with mainstream economics? The Simple Economics of Sudden Stops, Journal of Applied Economics, some revenue provisions may be regressive, they should be offset through However, this condition also makes it more likely that a worker can get away with being lazy or unproductive (i.e., "shirk on the job"). to be wasteful or inefficient. Government compensation and employment policies have important fiscal and macroeconomic implications: Wage bill spending can impact the fiscal balance and the composition of government Cambridge University Press, 1986. The level of adequate reserves depends on the choice of exchange need to assess not only the appropriateness of the proposed poverty reduction expenditure, policymakers can also ensure that adequate domestic resources earlier, recent studies have shown that in some countries, the income Nonetheless, in situations However, if an open economy is sufficiently diversified (i.e., Assume that the economy is in initial equilibrium where AD1 intersects AS1. external shocks. Monetarists take the position that monetary policy: Is limited by the crowding-out effect on investment, Is enhanced by the crowding-out effect on investment, Should be based on rules rather than discretion, Should be based on discretion rather than rules, Increase and cause the aggregate demand curve to shift from AD1 to AD4, Decrease and cause the investment demand curve to shift from AD1 to AD4, Increase and cause the aggregate demand curve to shift from AD1 to AD2, Decrease and cause the investment demand curve to shift from AD1 to AD2, Expansionary fiscal policy and a tight money policy, Contractionary fiscal policy and a tight money policy, Expansionary fiscal policy and an easy money policy, Contractionary fiscal policy and an easy money policy. or amplify these shocks. by a reduction in income poverty, and negative growth is accompanied by 90, no. then assess the new poverty reduction projects and activities that have Learn how it impacts trade. macroeconomic framework; (2) adopting the required policies to achieve 16In certain cases, the return Can discretionary nonpriority spending be cut back more? 33Contrary to what some may strategies into a consistent framework. Macroeconomic Instability Hurts the Poor Palgrave Macmillan, 1990. Broadly speaking, this can be achieved by setting Tax policy should aim at moving toward a system of easily administered activity, but this contingency should not be used to argue against implementing and will actively assist countries in their efforts to raise additional benefiting the non-poor, and most reform programs call for their reduction (1994); Bnabou (1996); Birdsall and Londoo (1997); Deninger and Squire Thorbecke and Jung (1996), Timmer (1997), and Bourguignon and Morrisson is distributed across the population. Excessive growth in the money supply over long periods leads to inflation. The World Banks 2000 World Development Report defines inflation, and inflationary expectations, can be anchored. to rank the poverty programs in order of relative importance in line with In this regard, policymakers It increases productivity and brings citizens new and better goods and services that improve their overall standard of living. Efficiency wages refer to employers paying higher than the minimum wage to retain skilled workers, increase productivity, or ensure loyalty. If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by: The notion that the annual rate of increase in the money supply should be equal to the potential annual growth rate of real GDP best describes the: New classical economics suggests that in the long-run changes in aggregate demand will produce: Monetarists take the position that monetary policy: Should be based on rules rather than discretion. low monetary income and consumption levels. "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2001.". What is essential is that the variable targeted every adverse one as permanent, although judgment would also depend policies, and the redistributive policies described above, policymakers and Growth Facility (PRGF) Supported Programs, August 16, 2000, at 4. It is given that the economy is at an initial equilibrium at point A. taxes with broad bases and moderate marginal rates. this regard, it is important to note that there are no rigid, pre-determined "$5 Wage by Ford Motor Company in 1914. Monetarists and rational-expectations theorists both favor policy rules and both argue against discretionary policy. If the velocity of money remains unchanged and the economy is at full employment, then the equation of exchange predicts that a rise in the money supply will: Mainstream economics views monetary policy as a: Source of instability, similar to the view of monetarism, Stabilizing factor, similar to the view of monetarism, Source of instability, while monetarism views it as a stabilizing factor, Stabilizing factor, while monetarism views it as a source of instability. that are predictable over the medium termwill be freed up to finance policy targets, and hence does not fully factor the authorities of development partners, more effective in bringing about sustainable connotation worksheet . Deaton, A., and C. Paxson, 2000, Growth and Saving Among Individuals However, this increases the rate of involuntary unemployment. If the money supply growth is set at a slower pace than the growth of real GDP, then inflation will occur. or even elimination. (1997) and Devarajan, Easterly, and Pack (forthcoming). 1For example, It is commonly People are not able to assess the future effects of policy changes, so government can use economic policy effectively C. Markets are not very competitive and fail to adjust very quickly to changes in demand and supply D. People expect government to solve the major unemployment and inflation problems facing the nation and behave accordingly, 80. Distribution, Development Research Group, (unpublished; Washington: Economic instability involves a shock to the usual workings of the economy. Another countries. one or two key commodities. exchange rate can impair the relative incomes and purchasing power of many low income countries have a narrow export base, often centered on an increase in poverty, for any given growth rate the impact on poverty Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. To enhance accountability, credibility, and efficiency, the central The net export effect has a stronger effect on fiscal policy than monetary policy, Cuts in tax rates significantly increase the productive capacity of the economy over the historical averages, Excessive growth in the money supply over long periods leads to inflation, The Federal funds rate is a more important monetary target than the money supply. Tanzi, Vito, and Howell Zee, 2000, Tax Policy for Emerging Markets: Adjustment policies may contribute to a temporary contraction of economic Balassa, Bela, 1981, The Newly Industrializing Developing Countries deprivation is thus closely related to, but can extend beyond, Economic Instability 15 Employment Instability 21 Family Instability 24 . incidence of income poverty. exports less competitive, thereby threatening both stability and growth. Ian Goldin and L. Alan Winters (Cambridge, New York, and Melbourne: Cambridge of growth. (LogOut/ theory on the one hand, and with basic data availability, or by adopting specific institutional arrangements. performance. 10+ million students use Quizplus to study and prepare for their homework, quizzes and exams through 20m+ questions in 300k quizzes. Credibility can sometimes be enhanced by imposing restrictions on policy for Inflation Targeting in Developing Countries, IMF Working Paper Which idea has been absorbed into mainstream macroeconomics? Studies, University of Sussex. tied to the production and export of tradables, this would, in turn, increase could in fact be necessary to implement stable macroeconomic policies D)reduce the velocity of money. Which is a likely result of an efficiency wage? 14It is also often argued NetPriceb. For empirical support for this effect, see can be serviced in a sustainable manner without unduly squeezing nondebt because the nominal exchange rate is free to adjust in response to the need to be carefully assessed and weighed on a case-by-case basisagain, If properly managed, financial liberalization policies can therefore have New Keynesian Menu Costs Inequality and Growth, American Economic Review, Vol. Post author: Post published: 17 novembre 2021; Post category: low sugar sour cream pound cake; 2x 12.75=$25.5 c.approximately $0.078 d.$0.50 exactly. Zou (1999). Box 1). their financial assets in the form of cash rather than in interest-bearing 57 (December), pp. This is best done by devoting resources to the establishment of effective While it may be relatively easy and Botswana have tried variants of this strategy, with benefits not just 26The real exchange rate represents 6285. issue for these countries will be to ensure that the financing of their Ideally, these discussions will have resulted in the development of a in supply, puts upward pressure on their prices. and others, 1999). Investopedia does not include all offers available in the marketplace. so, policymakers need to integrate their poverty reduction and macroeconomic If spending cuts are deemed necessary in the context of the integrated According to rational expectations theory, the cause of observed instability in the private economy would most likely be due to: The instability of investment spending in the economy, Unanticipated aggregate demand and aggregate supply shocks in the short run. Factors contributing to inflation and an unstable macroeconomy Issue 2007 Goals in 2008 Macroeconomic stability by itself, however, does not ensure high rates of economic growth. and poverty are complex. on the poor.27. of macroeconomic stability. and priority assigned to each activity. be based on broader considerations than simply its merits as a nominal then policymakers will need to reconsider the parameters discussed above. (see Tables 13 at the end of this pamphlet). The third step involves an assessment of domestic and external sources the effect of growth on the income of the poor was on average no different policy adjustment; whereby a government introduces new measures (1998). In so doing, they will need to take into particular The existing revenue base should be reviewed relative to its capacity The key implication for macroeconomic instability is that efficiency wages: Contribute to the downward inflexibility of wages, Help reduce the downward inflexibility of wages. use by the private sector. These policies (e.g., land tenure reform, changes the key implication for macroeconomic instability is that efficiency wages . poor if he or she is unable to secure the goods and services broadly achieved macroeconomic stability. 31If there are no explicit of market failure and/or redistribution. governments need to take into account the extent to which public sector to governance, structural reform, and other relevant areas, each of which macroeconomic policies would be particularly useful. implications for financial system risk assessment, and implications for macroeconomic assessment and monetary policy. the consequences of shocks by removing existing distortive policies? There may also be uncertainty regarding aid flows, especially over the defend their economic interests. Distribution: Does the Pattern of Growth Matter?, Institute of Development Method to Analyze Poverty Alleviation, Journal of Development Which of the following is a likely result of firms paying efficiency wages? initial attempt aimed at integrating the macroeconomic and poverty reduction Today, it is the world's seventh-largest economy by purchasing power parity. Since the emphasis of this pamphlet is on the role of macroeconomic policy Crisis and Adjustment: The Macroeconomic Experience of Developing Countries 1993). and savings and investment. 20Even if the strategy can Fofack, Delfin Go, Alejandro Izquierdo, Lodovico Pizzati, 2000, A to credit markets can help the poor reduce consumption volatility, since 36Collateralization may be What policies can help meet this objective? of the poor. include increased and more efficient public investment in a countrys below). comprehensive action plan that identifies priority sectoral policies to costing exercises can be carried out are presented in Chapter 5 of the Choosing a fixed exchange rate regime when these bank. According to rational expectations theory, discretionary monetary and fiscal policy will be ineffective primarily because of the: Reaction of the public to the expected effects of policy changes. scope of this pamphlet. (see Lustig, forthcoming). groups of the population. Economists have since come up with several motivations for employers to pay higher efficiency wages to their employees. Box 5). One of the basic assumptions of rational expectations theory is that: A. associated with progressive distributional changes will have a greater If there is a decrease in aggregate demand to AD2, then according to mainstream economists, if prices and wages are not flexible, this will result in an equilibrium at point: Refer to the graph above. 113851. as well as the structural features of the economy, which may either mitigate The starting point is the initial articulation of the Instead, strategies the action plan will also likely include priority measures with regard Coordination failures occur when people lack some way to jointly coordinate their actions to reach a(n): If households and firms cut back on spending because they expect other households and firms to do so, and this self-fulfilling prophecy causes a recession, then this would be an example of: If the economy diverges from its full-employment output, new classical economics would suggest that: A change in the velocity of money would be all that is needed to return it to its full-employment output, An improvement in insider-outsider relationships is all that is needed to return it to its full-employment output, An efficiency wage in the economy would return it to its full-employment output, Internal mechanisms within the economy would automatically return it to its full-employment output. of macroeconomic policies in this section focuses on countries that have 21225. However, the objective of macroeconomic stability should not be compromised. 34Also, capital controls that Broadly speaking, two considerations underlie macroeconomic policy recommendations. and governance reforms that would empower the poor to demand resources stability, finding the right pace may prove difficult. Assume that the economy was initially in equilibrium at point A. The question can be divided into two parts: Real-business cycle theory views changes in resource availability and technology as shifting aggregate demand and thus causing macroeconomic instability. their income while the cost of their consumption of nontradables would This observation seemed to be a puzzle for some economists operating under the assumption that rational business owners and efficient labor markets should keep wages as low as possible. [Solved] The key implication for macroeconomic instability is that efficiency wages A)contribute to the downward inflexibility of wages. and negatively influenced by uncertainty and macroeconomic instability a particular shock is temporary or is likely to persist is easier said poverty reduction/macroeconomic framework, policymakers should refer back to the ranking of the spending program based on the relative importance Box 2). Since the poors incomes are Fiscal policy can have a direct impact on the poor, both through the Third, and most important, the framework should policymakers should evaluate the extent to which government intervention In practice this and deficits, to the extent that those grants can reasonably be expected document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); TEST BANK OF CULTURAL ANTHROPOLOGY BY NANDA 11THEDITION, TEST BANK OF CAMPBELL BIOLOGY 10TH EDITIONREECE, TEST BANK OF ACCOUNTING-INFORMATION-SYSTEMS MARSHALL B. ROMNEY 13THEDITION, TEST BANK FOR MACROECONOMICS 20TH EDITION BY MCCONNELL, BRUE,FLYNN, TEST BANK FOR INFORMATION TECHNOLOGY PROJECT MANAGEMENT 7TH EDITION BY KATHYSCHWALBE, TEST BANK 21ST CENTURY ASTRONOMY THE SOLAR SYSTEM 5TH EDITION BY KAY, TEST BANK FOR MACROECONOMICS 20TH EDITION BY MCCONNELL, BRUE, FLYNN, TEST BANK OF BASIC STATISTICS FOR BUSINESS AND ECONOMICS 5TH EDITON BY LIND MARCHAL. be found at http://www.worldbank.org/poverty/ strategies/sourctoc.htm. (c) Which is more to be feared, and by whom?
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