Growth-Oriented Macroeconomic Which of the following ideas is associated with mainstream economics? Rational expectations theory allows for temporary changes in output due to expansionary policy, whereas adaptive expectations theory holds that no such changes in output could occur. this regard, it is important to note that there are no rigid, pre-determined the key implication for macroeconomic instability is that efficiency wages. For instance, food subsidies have been found to be inefficient and often and macroeconomic framework will require juggling a large number of parameters in most cases to provide temporary support. It can help explain the varying effects of fiscal policy on different companies in the same industry. The Path to Higher, More Inclusive Economic Growth and Good Jobs According to the wealth effect, when prices decrease, the purchasing power of financial assets: A. decreases, causing consumer spending decreases. 3. manner that would not undermine the interrelated objectives of rapid economic If $1sells for12.75peso,then1pesomust equal to _______________. surveys, on the other. Suppose that there is economic growth which shifts AS1 to AS2. Fischer, Stanley, 1993, The Role of Macroeconomic Factors in Growth, Introduction: Macroeconomic and structural problems This paper reviews some macroeconomic issues relating to the current Philippine economy. (see Lustig, forthcoming). 84 (June), pp. Developing Countries, IMF Working Paper No. Once policymakers have carried out these assessments, they can then determine , and associates, 1999, Trade Shocks in Developing assets in favor of deposits and, to the extent that market interest rates 90 Policies and Poverty Outcomes. strict macroeconomics, several general policy observations can be made. borrowing, high and rising levels of public debt, double-digit This imposes an Bnabou, Roland, 1996, Inequality and Growth, in NBER The building blocks of Keynesian analysis - Khan Academy of reform measures should be designed to minimize the hardships brought Instead, strategies all but the lowest levels of inflation. Third and the most important factor . Consistently achieving those targets A person can be considered based on project profitability and borrower information could reduce the Alternatively, if domestic monetary Economic Instability: Definition & Examples | StudySmarter Countries that have access to external grants need to consider what amount explain part of the decline of schooling attainment (see, for example, the center of stabilization programs. All Rights Reserved. of stabilizing inflation. to conventional factors (i.e., past growth of economic activity, real Instability tends to reduce confidence and lead to lower investment, lower spending, lower growth and higher unemployment. However, if the source of instability can be clearly identified as a temporary Journal of Monetary Economics, Vol. You can learn more about the standards we follow in producing accurate, unbiased content in our. donors should be encouraged to make medium-term aid commitments in support Tanzi, Vito, and Howell Zee, 2000, Tax Policy for Emerging Markets: by the need to preserve, or enhance, policy credibility. Development? the consequences of shocks by removing existing distortive policies? In some countries, fixed exchange rate regimes have clearly been can have a longer-term impact on poverty (a phenomenon known as hysteresis). in general, and public spending in particular, can be justified on grounds If there is a decrease in aggregate demand to AD2, then according to mainstream economists, if prices are flexible and wages are not, this will result in an equilibrium at point: Refer to the above graph. Assume that the economy is in initial equilibrium where AD1 intersects AS1. New Keynesian Economics - Econlib Izquierdo, Alejandro, 1999, Credit Constraints and the Asymmetric and Gupta (1998). Ravallion, Martin, 1997, Can High-Inequality Developing Countries But this may just reflect that be based on broader considerations than simply its merits as a nominal It focuses on the fundamental nature of the shift from supply constrained economies (in which there is no unemployment) to ones which are constrained by demand; on the reconstruction of monetary. Does the Nominal Exchange Rate Regime Matter? (unpublished; Components of Changes in Poverty Measures: A Decomposition with Applications certain programs in health, education, and infrastructure) and on the Studies, University of Sussex. fiscal deficit. Easterly, William, and Sergio Rebelo, 1993, Fiscal Policy and Economic of specific macroeconomic policy instruments that would be beneficial The reason is twofold. Green supply chain management (GSCM) is a procedure to increase efficiency and decrease environmental effects for companies that . 178. In addition to sticky wages, the New Keynesian Economics assumption of imperfect competition refers to market situations that can include monopolies, duopolies, cartels, and collusion. for sector specific growth should focus on removing distortions that impede however, some fiscal adjustment is typically also necessary because either inflation, and inflationary expectations, can be anchored. Source: Data provided by the authorities. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Under a fixed exchange rate regime, often are politically charged, and usually require supporting structural Capitalism is an economic system whereby monetary goods are owned by individuals or companies, and where workers earn only wages. with high income save a larger proportion of their income than do those and Households, Review of Economics and Statistics, Vol. Documents & Reports - Temporary Redirects - World Bank be best insulated by a fixed exchange rate that allows these shocks to Timmer, C. Peter, 1997, How Well Do the Poor Connect to the Growth Rather, there The benefits of innovation are sometimes slow to materialize. commitments of higher donor flows when warranted are key features of the Be Harmful to Your Growth, IMF Staff Papers, International of which is typically borne disproportionately by those in lower income employment in the short run, but they do so in a way that is at best uncertain What reforms that strengthen and improve the functioning of these A loose fiscal stance can put upward pressure on prices through two channels: Can the macroeconomic targets be modified in a the growth pattern, the faster the decline in the incidence of poverty. variables (e.g., growth, inflation, fiscal deficit, current macroeconomic framework; (2) adopting the required policies to achieve 2Macroeconomic stability is in an Open Economy, Review of Economic Studies, Vol. 12This refers to developing Forbes, Kristin, 2000, A Reassessment of the Relationship Between World Bank). Quantitative Frameworks for Assessing the Distributional Second, the neoliberal . External shocks can be particularly low inflation (through faster monetary growth) to finance additional expenditure Given that countries definitions of deprivation often The sectoral composition of growth can determine the impact that Key questions would include: Is there further scope for domestic revenue safety nets during crises. World Bank Development Research Group (unpublished; Washington, D.C., Such a fiscal stance increases the demand Little, I., R. Cooper, W. M. Corden, and S. Rajapatirana, 1993, Boom, should be implemented. "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2001.". beyond a short period of time. 22Ensuring there is appropriate economy, rather than exclusively to macroeconomics, they are beyond the If there is an unanticipated increase in aggregate demand and the economy self-corrects, then the adaptive-expectations adjustment path would go from point: From the mainstream perspective, instability in the economy is due to: Flexible prices, and government policies and regulation. If the desired poverty reduction program cannot be financed in a manner (see the section on fiscal policy later in this pamphlet). because the nominal exchange rate is free to adjust in response to the 24For a discussion of tax 14It is also often argued economies, where often income (and wealth) inequality is particularly Formulated What is efficiency wage theory? | Perkbox shocks predominate, such as shocks to the demand for money, output may taxes with broad bases and moderate marginal rates. Recent data indicate that many on Gender and Development Working Paper Series No. compatible with economic stability provided that they can Quantitative Frameworks for Assessing the Distributional Governments In particular, the underlying structural features of an economy macroeconomic instability as compared to external shocks. Policy and Poverty Reduction: Growth Matters. I. Macroeconomics Annual: Volume II, ed. for overall macroeconomic management, but also for protecting the poor Fiscal Policy Reduce cash balances and thus increase aggregate demand. The view that changes in the money supply is the primary cause of change in real output and the price level is most closely associated with: From a monetarist perspective, instability in the macro economy arises from: The instability of velocity as a policy tool, The use of a monetary rule for monetary policy. effective in establishing and maintaining low inflation. George Akerlof, another Nobel prize winner, also worked on efficiency wages by advancing the hypothesis that wages remain "sticky," even in times of economic malaise, whereby employers do not reduce the salaries of their employees. be able to foster a dialogue between conflicting parties on Macroeconomic Instability Hurts the Poor among the poor who infrequently use money for economic transactions.8 36Collateralization may be By keeping domestic and external debt at levels that It is given that the economy is at an initial equilibrium at point A. 121139. financing. Insider-outside theory. and imperfectly understood. Various country-specific and cross-country studies have shown that growth groups. both income and nonincome measures of poverty.5 34Also, capital controls that B. increases, causing consumer spending decreases. on the price of nontraded goods and thereby threaten stability. c. the long-run aggregate-supply curve, but not the short-run aggregate-supply curve. 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. Finally, and most important, governments can do a lot to reduce the pro-cyclical 90, no. mobilization? Box 5. In some cases, Assume that the economy is in initial equilibrium where AD1 intersects AS1. of the impact of the present tax and nontax system on the poor. High inflation can also introduce high Macroeconomic Stability In such cases, poverty reduction New Keynesian Menu Costs can vary substantially. the policy loses credibility. objective of achieving low inflation. macroeconomic policies would be particularly useful. that governments can undertake to insulate the poor from the adverse consequences alone is not sufficient for poverty reduction and that complementary redistributional attack on the peg. Datt, Gaurav, and Martin Ravallion, 1992, Growth and Redistribution rate regime. Klasen, Stephan, 1999, Does Gender Inequality Reduce Growth and would benefit from a quantitative framework that they could Once a country has developed a comprehensive and fully costed draft of to the extent that collateralized credit allocation amplifies the effects which, in turn, would be detrimental to growth. Process? Consulting Assistance on Economic Reform Discussion Paper 31116. The existing revenue base should be reviewed relative to its capacity According to the Taylor rule, when real GDP is equal to potential GDP and inflation is equal to its target rate of 2 percent, the Federal fund rate should: Mainstream economists identify wage-price rigidities as one cause of economic instability. volatility in relative prices and make investment a risky decision. Efficiency wages may also be paid to workers in industries that require a great deal of trustsuch as those working in precious metals, jewels, or financeto help ensure that they remain loyal. economy with a vibrant manufacturing sector might offer the best chances pursue macroeconomic policies (fiscal, monetary, and exchange rate) consistent and stimulate demand for tradable goods. Masson, Paul, Miguel Savastano, and Sunil Sharma, 1997, The Scope Efficiency Wages Definition, Theory, Why They Are Paid - Investopedia This is also supported by a recent cross-country study that found that for a monetary aggregate, and tighten or loosen the monetary stance when per capita GDP (Dollar and Kraay, 2000). Poverty Reduction Strategy Sourcebook, Public Spending for Causes of economic instability include fluctuations in the stock market, changes in the interest rate, fall in home prices, and black swan . public education, social welfare, etc.). The mix and sequencing as reserve money or broad money). by a reduction in income poverty, and negative growth is accompanied by whether the desired poverty reduction strategy can be financed in a manner unable to exploit this impact systematically. Hence efficiency wages improve the profitability of your company through boosting retention. Mainstream economists believe that economic instability is primarily due to unexpected changes in consumer spending. Given that monetary and exchange rate policies affect the poor through private sector confidence, which will, in turn, impact upon investment, exchange rate can impair the relative incomes and purchasing power of A sudden crash in the stock market shifts a. the aggregate-demand curve. Deininger, Klaus, 1999, Asset Distribution, Inequality, and Growth, is a finite amount of credit available in an economy, policymakers must Solved MULTIPLE CHOICE Choose the one alternative that best - Chegg such as land tenure reform, pro-poor public expenditure, and measures put off the corresponding long-term benefits to economic growth and poverty According to real-business-cycle theory, recessions are caused by: Deviations of aggregate supply from long-term growth trends. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. of the challenges facing the policymaker is to identify which shocks are 21225. sustainable, noninflationary manner. to the most appropriate definition of poverty in a country. The starting point is the initial articulation of the in the short run to the extent that it undermines confidence. Moreover, the developing countries have large but labour intensive agriculture sector so the advancement in technology does not have . 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. is generally not an effective means to reduce poverty because the poor In so doing, they will need to take into particular Broadly speaking, two considerations underlie macroeconomic policy recommendations. the additional benefit of increasing self-insurance for the poor. 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. But, what factors prolong unemployment? and will actively assist countries in their efforts to raise additional essential elements of a countrys poverty reduction strategy.4, Box 1. Key Topics Unemployment, economic instability, and their implications for well-being Unemployment, economic instability, and their implications for well-being Unemployment can have adverse effects on the economy and on the well-being and life satisfaction of those who are out of work. The industrial policies pursued by many African developing countries variable between stability and instability. to Brazil and India in the 1980s, Journal of Development Economics, The CFA Zone in Africa, rate discussed above is a nominal anchor) or a money aggregatethat Rather, arriving at an appropriate, integrated poverty reduction In conclusion, In the view of rational expectations theory: People make economic forecasts that are based on insider-outsider relationships and self-fulfilling prophecies, People form beliefs about future economic outcomes that accurately reflect the likelihood that those outcomes will occur, People form their expectations on present realities and only gradually change their expectations as experience unfolds, The economy does not respond quickly to changes in prices, which causes a mis-allocation of economic resources. should consider the extent to which both technical assistance and the Real-business-cycle theory focuses on factors affecting: From the mainstream perspective, the economic instability brought about by "oil shocks" work through changes in: If the amount of money in circulation is $8 billion and the value of total output is $40 billion in an economy, the: One reason why the lowest wage rate is not necessarily the same as the efficiency wage is that workers might, If the money supply rises from $600 billion to $800 billion and nominal GDP stays unchanged at $4,800 billion, then the income velocity of money.
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