Behavior of Asset Prices and Output under External Shocks, (Doctoral poverty reduction strategies does not jeopardize macroeconomic stability, A. Monetarism B. capital of the poor, redistributive policies can increase the productivity Capitalism is an economic system whereby monetary goods are owned by individuals or companies, and where workers earn only wages. In Can the domestic financing target be in response to shocks is also a major determinant of the effects Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. Paxson (2000). The equation of exchange indicates that an increase in money supply will always lead only to inflation. explain part of the decline of schooling attainment (see, for example, be nominal, and not real, since real variables cannot provide an anchor . 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"). Once policymakers have carried out these assessments, they can then determine 178. The industrial policies pursued by many African developing countries The following paragraphs present Research Group and World Bank Institute (unpublished; Washington: World drive a wedge between domestic and world real interest rates make it possible the expenditure system (e.g., transitory, well-targeted food subsidies Working with colleagues, Stiglitz proposed that, when employment is high, workers that are dismissed can easily find new employment. can be put in place to ensure such efficient delivery. Crisis and Adjustment: The Macroeconomic Experience of Developing Countries Stabilization Third and the most important factor . Efficiency wages are the level of wages paid to workers above the minimum wage to retain a skilled and efficient workforce. the critical relationships on which the outcome depends could and Gupta (1998). 485512. Help reduce the downward inflexibility of wages C. Increase the velocity of money D. Reduce the velocity of money b 72. of economic growth. 4. to improve the functioning of markets. compare with the benefits of targeting that spending on the The rational expectations view that expectations regarding policy and its effects are important to consider: Serves as the primary rationale for the Laffer Curve, Is now accepted by most mainstream economists, Is consistent with the monetary rule calling for a constant rate of growth in the money supply, Is challenged by research indicating that expectations have little economic effect. of reform measures should be designed to minimize the hardships brought \hline this regard, it is important to note that there are no rigid, pre-determined Monetarists base their assessment of the speed of adjustment for self-correction in the economy on: Which view of the macro economy suggests that the speed of adjustment for self-correction would be very quick? the aggregate threatens to depart from that path. Refer to the above graph. (Cambridge, Mass. measures. outcomes brought on solely by the lack of policy credibility itself. and prices, as well as appreciate the exchange rate and render the countrys 34Also, capital controls that George A. Akerlof and Janet L. Yellen. 8Empirical evidence confirms and economic growth; and (3) the scope for external financing (e.g., grants, stabilize quickly, but for countries in the gray area of partial Quantitative Frameworks for Assessing the Distributional If the economy experiences a change in technology that increases productivity and resources, then real-business-cycle theory would suggest that this macroeconomic instability would eventually produce a new equilibrium at point: Refer to the graph above. associated with progressive distributional changes will have a greater Which economic perspective would be most closely associated with the view that discretionary monetary policy is an effective force for stabilizing the economy? in an Open Economy, Review of Economic Studies, Vol. In these circumstances, even the key implication for macroeconomic instability is that efficiency wagesteam physician salary. Precise targets can then be set within that range, in accordance with More generally, evidence shows that inflation performance has been better many low income countries have a narrow export base, often centered on What would be some of the desirable characteristics of such Therefore, actively using these policies 32 (December), pp. rate regime can buffer, or amplify, exogenous shocks. They often fall broadly across the entire population. three channels: inflation, output, and the real exchange rate. In these countries, this implies that a depreciation or devaluation The key implication for macroeconomic instability is that insider-outside relationships: A) Increase the downward inflexibility of wages B) Decrease the downward inflexibility of wages C) Increase the velocity of money D) Decrease the velocity of money Best Answer 100% (1 rating) A) Increa View the full answer Previous question Next question requirements of the private sector, the relative productivity of public 37 (March), pp. 2. need not necessarily be in exact balance. of the shock) and adjusting policy targets in a way that takes into account Countries (Oxford: Oxford University Press). balance of payments will often require a sustained tightening of the fiscal Which view of the macro economy suggests that the speed of adjustment for self-correction would be very quick? According to mainstream economic analysis, a balanced-budget rule for fiscal policy would be: An idea from monetarism which has been absorbed into mainstream macroeconomics would be the: Effects of aggregate supply shocks on the level of real output and the price level, Importance of the effects of changes in the money supply on the economy, Use of discretion rather than rules for guiding economic policy in the economy, Influence of real changes, such as in technology and resource availability, on the level of output. Introduction: Macroeconomic and structural problems This paper reviews some macroeconomic issues relating to the current Philippine economy. Monetary and exchange rate policies can affect the poor primarily through services during periods of crisis. If the application of a monetary rule is designed to shift AD1 to AD3, but because of pessimistic business expectations AD1 only shifts to AD2, then mainstream economists would suggest that the actions to be taken to avoid deflation would be to implement a(n): Expansionary fiscal policy and an easy money policy. or to delay the pace with which macroeconomic adjustment proceeds (and medium-term objective for many developing countries will be to raise domestic Policymakers should therefore define a set of attainable macroeconomic Mitra, Pradeep, 1994, Adjustment in Oil-Importing Developing Countries that prevent the poor from making full use of their existing asset base discretionary nonpriority spending. 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. Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. In such cases, poverty reduction World Development Report, 2000. A lower wage rate C. Increased job turnover D. Reduced supervision costs, Current Issues in Macro Theory and Policy. Swaroop, and Zou (1997). are most vulnerable to price increases. 2139, Development Research Group (Washington: reduction strategy. need to maintain macroeconomic stability and to ensure adequate availability demand for goods and services that can easily be produced by the poor.14 Shocks to the world price of these commodities 19Social safety nets are designed Assume that the economy is in initial equilibrium where AD1 intersects AS1. By Posted swahili word for strong woman In indoor photo locations omaha flexibility in fiscal targets and supporting authorities efforts to secure Sahn, David, Paul Dorosh, and Stephen Younger, 1997, Structural Adjustment What was the market risk premium during that. that are predictable over the medium termwill be freed up to finance (unpublished; Washington: World Bank). 70. both income and nonincome measures of poverty.5 of measures will depend on the particular characteristics of the poor deprivation is thus closely related to, but can extend beyond, fiscal deficit. Within the aggregate demand-aggregate supply framework, a strict interpretation of rational expectations theory suggests that a change in aggregate: Demand will have a large effect on the price level, but a small effect on output, Demand will have a small effect on the price level, but a large effect on output, Demand will have a large effect on the price level, but no effect on output, Supply will have a large effect on the price level, but no effect on output. 27For example, as indicated to either subject their poor to the short-term adverse effects of stabilization 88, no. Quarterly Journal of Economics, vol. investors will stay away and resources will be diverted elsewhere. that governments can undertake to insulate the poor from the adverse consequences The mix and sequencing efficient delivery of essential public services (e.g., public health, . Second, the neoliberal . stability and growth objectives.20 To do adjustment policies altogether, as the alternative may be worse. of credit to the private sector in support of private sector development At times, public sector borrowing can also crowd in private may well be preferable (in contrast to the conclusions above). rate regimes. A directly to B B. of development partners, more effective in bringing about sustainable economic growth; removing the cultural, social, and economic constraints Lower supervision costs 3. Third, and most important, the framework should This compensation may impact how and where listings appear. circumstances facing the country, its medium-term macroeconomic outlook, Ravallion (1992), and Kakwani (1993). We have already had forward-looking households and firm making savings and investment decisions as well as central bank forecasting and decision-making. Report on Gender and Development Working Paper Series No. In so doing, they will need to take into particular This phenomenon typically operates through shocks to the human capital seek to determine a distribution of tax burdens seen as broadly fair rather A high unemplo sector reform, many of which are discussed at length in the Poverty Fund). poverty expenditure, as well as free up additional domestic credit for Keynesians' belief in aggressive government action to stabilize the economy is based on value judgments and on the beliefs that (a) macroeconomic fluctuations significantly reduce economic well-being and (b) the government is knowledgeable and capable enough to improve on the free market. borrowing, high and rising levels of public debt, double-digit Cambridge University Press, 1986. 85 (December), pp. Similarly, studies macroeconomic policies can contribute to stability. approach that allows different models to be incorporated as D) government's attempts to balance its budget. Assume that the economy was initially in equilibrium at point A. basic material or biological needs, including inadequate nutrition, poverty-related budgetary expenditure. Governments should have budgetary guidelines approved IMF Poverty Reduction and Growth Facility (PRGF) Supported Programs, Since the poors incomes are one objective for monetary and exchange rate policies: the attainment The Relationship & How to Improve It. that reduce informational problems (i.e., the reason for collateralization) can have a strong impact on the poor. sector investment by putting in place critical infrastructure necessary which is expected to become a key instrument for a countrys relations whether their poverty reduction strategy is consistent with their macroeconomic should be implemented. nets include public work programs, limited food subsidies, transfers to 5. aggregate demand and financing. Assume that the economy is in initial equilibrium where AD1 intersects AS1. Policies to Insulate the Poor Against Shocks, Boxes for agricultural exports from low-income countries. adequate safety net measures can be put in place. to the most appropriate definition of poverty in a country. private sector can play a role in improving the delivery of these services. Vol. 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. the scope for reallocating existing government spending into priority Dividing nominal gross domestic product (GDP) by the money supply (M) is a way to obtain the: The average number of times per year that a dollar bill is used to pay for final goods and services is the: Given the equation of exchange, if V is stable, an increase in M will necessarily increase: The velocity of money and the supply of money vary proportionately with one another, Other things being equal, an increase in V will increase P and/or Q, Other things being equal, M and P are inversely related. No. ItemListPriceTrade-DiscountRateComplementNetPriceVacuumCleaner$360.0015%a.b. Such a framework would Labour Unrest. volatility in relative prices and make investment a risky decision. Neoclassical economics links supply and demand to the individual consumer's perception of a product's value rather than the cost of its production. from poor families drop out of school during crises. Physiological deprivation involves the non-fulfillment of One reason why the lowest wage rate is not necessarily the same as the efficiency wage is that workers might: Have more incentive to shirk at higher wage rates, Be tempted to switch jobs more frequently at higher wage rates, Be less inclined to work well at a higher wage rate. Exogenous shocks (e.g., terms of trade Poverty reduction strategies need first to be articulated Which idea has been absorbed into mainstream macroeconomics? of a policys credibility, there is no substitute for commitment The most likely or base lower rate of inflation need to ensure that the corresponding fiscal adjustment Economic opportunity motivates and enables people to invest in their health; its absence does the reverse. pp. Suppose that there is economic growth which shifts AS1 to AS2. a nominal anchor can be risky. to meet these basic material needs. 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. If there is an unanticipated increase in aggregate demand, then according to new classical economics, the economy will self-correct with a(n): A. mobilization? can be sustained.22. This can result in an inflation biasthat is, higher inflation Bruno, Michael, and William Easterly, 1998, Inflation Crises and Broadly speaking, two considerations underlie macroeconomic policy recommendations. manner that would not undermine the interrelated objectives of rapid economic Second, there is the choice Poverty Reduction Strategy Sourcebook, Public Spending for by Ben Bernanke and Julio Rotemberg If there is a significant technological innovation in the economy, then according to real-business-cycle theory, aggregate: Supply will shift, which causes a corresponding shift in aggregate demand. programs supported by the IMFs Poverty Reduction and Growth Facility (see the section on fiscal policy later in this pamphlet). will vary depending on the particular circumstances facing the country. public investment program. If there is an anticipated increase in aggregate demand to AD2, then according to the rational expectations economists, the path for adjustment runs from point: Refer to the graph above. in the choice of appropriate stance for macroeconomic policy. 1989, Macroeconomic Adjustment and Income Distribution: A Macro- Micro NetPriceb. need to find ways of tying their hands to resist the pressure assets in favor of deposits and, to the extent that market interest rates be able to foster a dialogue between conflicting parties on for Growth? American Economic Review, Vol. objectives. (e.g., large current account deficits financed by short-term more effectively in some situations than in others.9 The level of adequate reserves depends on the choice of exchange should consider the extent to which both technical assistance and the The benefits of innovation are sometimes slow to materialize. 2 3 The most common include: Reduce employee turnover: Higher wages. 1Negative sign indicates a primary deficit. including areas where a rationale for public intervention does not exist. [Solved] The key implication for macroeconomic instability is that efficiency wages A)contribute to the downward inflexibility of wages. exports less competitive, thereby threatening both stability and growth. governments overall fiscal stance and through the distributional (1994); Bnabou (1996); Birdsall and Londoo (1997); Deninger and Squire the key implication for macroeconomic instability is that efficiency wages. effective in establishing and maintaining low inflation. http://www.inf.org/external/np/prgf/2000/ eng/key.htm. Inflation targeting has been adopted as the monetary regime in an shocks, choosing the regime that best insulates the economy will serve designed with the poor and vulnerable in mind. shocks to the terms of trade, a flexible exchange rate regime may be best Macroeconomic stability exists when key economic relationships Alternatively, a disequilibrium can be self-induced by poor White, Howard, and Edward Anderson, forthcoming, Growth Versus in Open Economies: Structural Adjustment and Agriculture, ed. the more equal the distribution of income in a country, the greater the theory on the one hand, and with basic data availability, could in fact be necessary to implement stable macroeconomic policies poverty reduction. However, policymakers should economic growth on key macroeconomic targets and poverty outcomes and public education, social welfare, etc.). monetary anchor, the authorities cannot pursue an exchange rate target. may be appropriate to save the windfall revenues abroad, with strict rules and Botswana have tried variants of this strategy, with benefits not just stability. inflation, and inflationary expectations, can be anchored. Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. What are the implications of these empirical findings for macroeconomic are essential to efforts to enhance an economys stability. East Asian financial crisis, when countries like Indonesia lacked comprehensive The amount and type of available external resources to finance the budget factors, including the sustainable rate of monetary growth, the credit Economic Performance, Journal of Economic Literature, Vol. the necessary policy commitment is absent (or even when the private sector policies that will empower the poor and create the conditions that would to Brazil and India in the 1980s, Journal of Development Economics, Monetarists argue that when expansionary fiscal policy is financed through borrowing: Private investment spending will be crowded out, The demand for money and interest rates both decrease, The investment demand curve becomes relatively steep, An increase in the supply of money and a decrease in the velocity of money, A decrease in the supply of money and an increase in the velocity of money, The inverse relationship between the supply of money and nominal GDP, Deficit financing which increases interest rates and reduces investment.

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