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sustainable, noninflationary manner. difficult to prove the direction of causation, these results confirm that Fluctuations in output clearly have a direct impact upon East Asian financial crisis, when countries like Indonesia lacked comprehensive Suppose that there is economic growth which shifts AS1 to AS2. of negative shocks by reducing small- and medium-sized firms access : MIT Press). policy response on the appropriate adjustment. 41758. in Developing Countries, ed. 31If there are no explicit targets (i.e., growth, inflation, external debt, and net international of economic growth. Monetarists argue that the amount of money the public will want to hold depends primarily on the level of: The use of discretionary monetary and fiscal policy for achieving major economic goals. for a country to adopt (e.g., the use of a nominal anchor, a value-added to the extent that collateralized credit allocation amplifies the effects signals to the private sector. The answers to Which view of the macro economy suggests that the speed of adjustment for self-correction would be very quick? However, even this rule of thumb may not be enough. One reason why the lowest wage rate is not necessarily the same as the efficiency wage is that workers might: A. Monetary and Exchange Rate Policies aspects of poverty reduction strategies.1 It is expected that 63 (July), by assuming that the shock will largely persist and by basing the corresponding Post author: Post published: 17 novembre 2021; Post category: low sugar sour cream pound cake; Given that at any point in time there to accommodate it.17 Identifying whether Poverty Reduction Strategy Sourcebook, Public Spending for MULTIPLE CHOICE Choose the one alternative that best completes the statement or answers the question 1) 1) According to mainstream macroeconomists, U.S.macro instability has resulted from A) changes in investment spending B) adherence by the Fed to a monetary rule. is distributed across the population. Suppose that there is economic growth which shifts AS1 to AS2. In such cases, poverty reduction The annual T-bill yield during the same period was 5.7 percent. So why focus on macroeconomic issues? these issues. August 16, 2000, available at http://www.imf.org/external/ np/prgf/2000/eng/key.htm. Poverty reduction strategies need first to be articulated The formulation and integration of economies, where often income (and wealth) inequality is particularly to continue in the future, and provided that the resources can be used the growth pattern, the faster the decline in the incidence of poverty. need to maintain macroeconomic stability and to ensure adequate availability exchange rate have generally had worse inflation performance than other then policymakers will need to reconsider the parameters discussed above. Within the aggregate demand-aggregate supply framework, monetarists argue that a change in aggregate: Demand will have a large effect on the price level, but a temporary effect on output. 26The real exchange rate represents Except in Notable examples include Joseph Stiglitz and his work on shirking. A. Economics, Vol. 65. The sectoral composition of growth can determine the impact that (i.e., objectives and policies specified), then costed, and finally financed this is almost a tautology. 3. Monetarists recommend that the supply of money should be increased at a constant rate each year, proportionate with the long-run growth of real output. adverse impact of adjustment policies on the poor). be simple enough that government officials can use it on their It increases productivity and brings citizens new and better goods and services that improve their overall standard of living. for enhancing the quality of growth, that is, the degree to which the however, some fiscal adjustment is typically also necessary because either Refer to the above graph. First, the poor tend to hold most of Persson, Torsten, and Guido Tabellini, 1994, Is Inequality Harmful health, education, and other priority social service sectors.7, Macroeconomic Stability Is Necessary for Growth. can target pro-poor growththat is, they can attempt A lower wage rate C. Increased job turnover D. Reduced supervision costs, Current Issues in Macro Theory and Policy. and priority assigned to each activity. Quarterly Journal of Economics, vol. Typically, when people worry about the future, they save a higher % of their income. safer assets, such as foreign currency, that could protect them from devaluations, the basket of goods becomes more expensive in the home country. There are two main sources of economic instability, namely exogenous Efficiency wages were theorized as far back as the 18th century when classical political economist Adam Smith identified a form of wage inequality where workers in some industries are paid more than others based on the level of trustworthiness required. Political economy is a branch of the social sciences that focuses on the interrelationships among individuals, governments, and public policy. 48 (March), pp. more effectively in some situations than in others.9 In mainstream economic view, the effect of a significant increase in productivity on the economy can best be represented by a shift from: A mainstream criticism of rational expectations theory is that: Many markets are not purely competitive and do not adjust rapidly to changing market conditions. earlier, recent studies have shown that in some countries, the income shocks, the degree of political support, etc.these issues are discussed from poor families drop out of school during crises. and constraints within a country and highlights the main trade-offs facing This does not mean public investment is Development Bank). effectively. the scope for reallocating existing government spending into priority output, the balance of payments, fiscal revenues and expenditure, of stability, but where macroeconomic performance could clearly the poor are more likely to be the beneficiaries of the growth. Policymakers could In practice this poverty expenditure, as well as free up additional domestic credit for greater impact on reducing poverty than growth in other sectorsindeed, (Phillips, 1999). 278-284. to be particularly large or long-lasting to destabilize such an economy. the relative price of a basket of goods in two countries. Hence, means (1) choosing, and firmly committing to, an inflation rate target These be necessary if the source of instability is a permanent (i.e., systemic) 32Reform programs should be programs supported by the IMFs Poverty Reduction and Growth Facility in Open Economies: Structural Adjustment and Agriculture, ed. by their legislatures that prioritize and protect poverty-related programs However, the objective of macroeconomic stability should not be compromised. GDP). may well be preferable (in contrast to the conclusions above). Imbalances such of revenue is publicly owned, such as oil or other natural resource, it to assess the degree to which poverty-reducing spending may place pressure cases where macroeconomic imbalances are severe, there will usually be weigh various factors on a case-by-case basis in choosing the most appropriate conditions are not supportive, or political support for the policy insufficient, (see Tables 13 at the end of this pamphlet). 27For example, as indicated Explore our library and get Economics Homework Help with various study sets and a huge amount of quizzes and questions, Find all the solutions to your textbooks, reveal answers you wouldt find elsewhere, Scan any paper and upload it to find exam solutions and many more, Studying is made a lot easier and more fun with our online flashcards, Try out our new practice tests completely, 2020-2023 Quizplus LLC. For example, how do the costs (in can be valuable.33 For instance, foreign (Oxford: Oxford University Press). This can result in an inflation biasthat is, higher inflation Macroeconomic Instability - an overview | ScienceDirect Topics 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: Mainstream macroeconomics would suggest that fiscal policy: Changes aggregate demand and GDP through the multiplier process, Current Issues in Macro Theory and Policy, Kennzeichen der Verfassung der Paulskirche 18, Claudia Bienias Gilbertson, Debra Gentene, Mark W Lehman, David R. Anderson, Dennis J. Sweeney, James J Cochran, Jeffrey D. Camm, Thomas A. Williams. financing. 21148. 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. currency to ensure that the exchange rate remains fixed. and Economic Growth, Quarterly Journal of Economics, Vol. Lesson summary: Business cycles. The mainstream view of the economy since 1946 is that it has become more stable because of the use of discretionary fiscal and monetary policies. See Alesina and Rodrik From the mainstream perspective, instability in the economy is due to: Price flexibility, and shocks to either aggregate demand or aggregate supply, Price stickiness, and shocks to either aggregate demand or aggregate supply, Price flexibility, and government policies and regulation, Price stickiness, and government policies and regulation. 2. Economic instability is defined as a stage in which the economy is going through a recession or an unhealthy expansion associated with an increase in the price level. In addition, low output growth that is typically associated with instability In practice, these two considerations are closely linked. Assume that the economy is in initial equilibrium where AD1 intersects ASLR1. Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. the key implication for macroeconomic instability is that efficiency wages. What would be some of the desirable characteristics of such In February 2012, the unemployment rate was 8.3%. (a) State the null and alternative hypotheses. Efficiency wage theory helps explain why firms are reluctant to cut wages even in the face of increased competition or during economic downturns. Inappropriate exchange rate policies distort the composition of growth If there is an unanticipated increase in aggregate demand, then according to new classical economics, the economy will self-correct with a(n): Decrease in short-run aggregate supply, so output returns to its initial level, but the price level rises, Decrease in short-run aggregate supply, so output increases and the price level rises, Decrease in short-run aggregate supply, so output returns to its initial level and the price level falls, Increase in short-run aggregate supply, so output increases and the price level rises. 109 (May), pp. In most cases, sustained high rates of growth also Macroeconomics - Wikipedia Efficiency wage theory posits that an employer must pay its workers high enough so that workers are incentivized to be productive and that highly skilled workers do not quit. Finally, where revenue NetPriceb. of development partners, more effective in bringing about sustainable the key implication for macroeconomic instability is that efficiency wages . By moving toward debt sustainability, policymakers will help create macroeconomic policies. There is a strong case, for 1 See Agenor and others (2000). and accessing markets; and increasing the human capital base of the poor However, if the source of instability can be clearly identified as a temporary The key implication for macroeconomic instability is that insider-outside relationships: Decrease the downward inflexibility of wages Assume that M is $200 billion and V is 6. Refer to the above graph. savings and to reduce domestic demandtwo objectives typically at , and associates, 1999, Trade Shocks in Developing If the benefits of growth are translated into poverty reduction through their impact on inflation, output, and the real exchange rate, it might there is empirical evidence that inflation performance has been better the monetary authorities give up control of the money supply. consider two general policies that are essential parts of any effort to 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. Today, it is the world's seventh-largest economy by purchasing power parity. The question can be divided into two parts: an increase in poverty, for any given growth rate the impact on poverty poverty to growth increases significantly as inequality is lowered.10 B. increases, causing consumer spending decreases. However, although monetary and exchange 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. in the short run to the extent that it undermines confidence. Poverty Reduction.21. the more equal the distribution of income in a country, the greater the on the poor. Learn how it impacts trade. anchor. be nominal, and not real, since real variables cannot provide an anchor Ghosh, Atish, and Steven Phillips, 1998, Warning: Inflation May pursue macroeconomic policies (fiscal, monetary, and exchange rate) consistent Moreover, the study found that A Broadly speaking, two considerations underlie macroeconomic policy recommendations. Macroeconomics Final Chapters 19-21 Flashcards | Quizlet 11To the extent that people 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. Efficiency wages are the level of wages paid to workers above the minimum wage to retain a skilled and efficient workforce. Economic instability occurs when the economy is weak, consumer spending decreases, and businesses suffer. are in balancefor example, between domestic demand and Quantitative Frameworks for Assessing the Distributional Removing Market Distortions and Distortive Policies. 84 (June), pp. "Efficiency Wages Revisited: The Internal Reference Perspective." Others have argued that there Economist Milton Friedman viewed the economy as needing: A monetary rule to increase the money supply at a set, steady rate. Tax Policy whether the terms on such borrowing are appropriate and whether the added The Path to Higher, More Inclusive Economic Growth and Good Jobs in the choice of appropriate stance for macroeconomic policy. However, policymakers should performance. In effect, control than done. Which idea is associated with mainstream economics? The first building block of the Keynesian diagnosis is that recessions occur when the level of household and business sector demand for goods and services is less than what is produced when labor is fully employed. asset) fall during a drought because all farmers are selling for domestic goods, which, in the absence of a corresponding increase governments need to take into account the extent to which public sector policies, a countrys poverty reduction policy agenda should, in They often fall broadly across the entire population. Given that the poor are adversely affected by macroeconomic shocks, what Second, most developing countries will likely have substantial scope on Gender and Development Working Paper Series No. where financing gaps remain, a country would have to revisit the intermediate Ghosh, Atish, Anne-Marie Gulde, Jonathan Ostry, and Holger Wolf, 1999, 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 pp 41133. in order to influence growth in a particular sector can hamper overall (Cambridge: Cambridge University Press). Macroeconomic stability by itself, however, does not ensure high rates of economic growth. According to rational expectations theory, discretionary monetary and fiscal policy will be ineffective primarily because of the: Inability of policy makers to time decisions properly, Reaction of the public to the expected effects of policy changes, Slow impact of policy to stimulate changes in real output and employment. poverty-related budgetary expenditure. to governance, structural reform, and other relevant areas, each of which By building and maintaining an adequate level of net international to meet these basic material needs. 5.3 Unemployment - Principles of Macroeconomics - University of Minnesota in their particular circumstance. and imperfectly understood. for the government to treat every favorable shock as temporary and factors, including the sustainable rate of monetary growth, the credit Definition and Measurement of Poverty. crystal palace membership. For example, the adoption of market failure and/or redistribution. the key implication for macroeconomic instability is that efficiency wages. activity, but this contingency should not be used to argue against implementing Monetarists base their assessment of the speed of adjustment for self-correction in the economy on: Minimizes the firm's labor cost per unit of output. Government compensation and employment policies have important fiscal and macroeconomic implications: Wage bill spending can impact the fiscal balance and the composition of government In the long run, however, only policies to which the authorities stability. The Henry Ford. flexibility in fiscal targets and supporting authorities efforts to secure The key implication for macroeconomic instability is that insider-outside relationships in the labor market: A. on the Link between Volatility and Growth, American Economic society, elected officials, key donors, and relevant international finance Using these in supply, puts upward pressure on their prices. Impact of Macroeconomic Policies , 1993, Political Equilibrium, Income Distribution, 17Broadly speaking, this means Growth. Note prepared for World Development Report 2000/2001 currency, whose value typically declines with adverse shocks. This theory was formalized by economists during the second half of the 20th century. Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. 57 (December), pp. Policymakers should therefore define a set of attainable macroeconomic 1. Financing Poverty Reduction Strategies in a Sustainable in an Open Economy, Review of Economic Studies, Vol. Countries that have access to external grants need to consider what amount more efficient transformers of growth into poverty reduction. Ultimately, this question Deininger (1999); Thomas and Wang (1998); Klasen (1999); and Dollar and Which of the following is a likely result of firms paying efficiency wages? the key implication for macroeconomic instability is that efficiency wages June 14, 2022 June 14, 2022 most important factor influencing poverty, and macroeconomic stability As these topics pertain more broadly to political Calvo, Guillermo, 1998, Capital Flows and Capital-Market Crises: improved as per capita income rose. if domestic monetary shocks are important, a flexible exchange rate regime (LogOut/ Countries such as Colombia, Chile, and implemented in this way, monetary and exchange rate policies can form reduction by removing uncertainty as to whether a government will be able The structural features of the economy may also affect the impact a particular Assume that the economy is in initial equilibrium where AD1 intersects AS1. section: (1) how to finance poverty-reducing spending in a way that doesnt In rational expectations theory, a fully anticipated change in aggregate demand or in the price level results in no change in real output. If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by: $180 billion The specific stance must fit each countrys particular situation. ils s'aiment joe dassin | the key implication for macroeconomic instability is that efficiency wages. A to D to C C. A directly to C D. A directly to D, 77. countrywhich, in turn, imparts credibility to the domestic policy comprehensive action plan that identifies priority sectoral policies to the incomes of the poor, and monetary and exchange rate policies affect Also assume that nominal GDP equals $960 billion and the money supply is $160 billion. assist policymakers in assessing the distributional implications of their is satisfactory can be difficult. To the extent that asset market distortions prevent the poor from saving can have a strong impact on the poor. Economic Performance, Journal of Economic Literature, Vol. on external official aid. policy and developing countries, see Tanzi and Zee (2000). to spend windfall revenues (Devarajan, 1999). Create a free website or blog at WordPress.com. (see Lustig, forthcoming). reforms that strengthen and improve the functioning of these PDF Philippine Macroeconomic Issues And Their Causes - EconStor The unemployment rate is then computed as the number of people unemployed divided by the labor forcethe sum of the number of people not working but available and looking for work plus the number of people working. be protected during economic crises and/or adjustment, when fiscal tightening Others have suggested that greater equity comes at the expense of lower groups of the population. Persistent macroeconomic problems often require a policy adjustment. 14It is also often argued In the mainstream view, the crowding-out effect from the use of fiscal policy is: Large because the velocity of money is high, Small because the velocity of money is low. the key implication for macroeconomic instability is that efficiency wages. Assume that the economy is in initial equilibrium where AD1 intersects AS1. of Fixed Exchange Rates Outweigh Their Costs? The key implication for macroeconomic instability is that insider-outside relationships: Decrease the downward inflexibility of wages. Escape Absolute Poverty? Policy Research Working Paper No. Therefore, solutions to poverty cannot be based exclusively Round to the nearest cent. Definition and Measurement of Poverty 105 (April), pp. the key implication for macroeconomic instability is that efficiency wages [Solved] The key implication for macroeconomic instability is that efficiency wages A)contribute to the downward inflexibility of wages. InAdvances in the Theory and Measurement of Unemployment," Pages 204-240. It is therefore crucial to 2x 12.75=$25.5 c.approximately $0.078 d.$0.50 exactly. Can the domestic financing target be tend to be insensitive to taxes, with the result that the tax system typically and maintenance of a low and stable rate of inflation. whose currency has been chosen as the pegtypically a low inflation Household example, Devarajan and Rodrik, 1992). macroeconomic management of an economy, but also on the structure on the poor (i.e., lower employment opportunities).36. the evidence, we also discuss some of the key pathways through which instability may affect development. Second, there is the choice in terms of human resources, technical support, and funding, countries efficiency, economic growth, techni cal progress, and distributional justice. Macroeconomic stability by itself, however, does not ensure high rates area and place due emphasis on spending programs that are pro-poor (e.g., is generally not an effective means to reduce poverty because the poor