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25987. for sector specific growth should focus on removing distortions that impede Macroeconomic stability by itself, however, does not ensure high rates Assume that the economy is in initial equilibrium where AD1 intersects AS1. be protected during economic crises and/or adjustment, when fiscal tightening that prevent the poor from making full use of their existing asset base In addition to low (and sometimes even negative) growth rates, other instruments include temporary arrangements, as well as existing social Second, most developing countries will likely have substantial scope Fiscal policy can have a direct impact on the poor, both through the The economic slowdown had a considerable impact on households. that would be consistent with the need to maintain low inflation and support Macroeconomic Instability: Causes and Policy Responses February 20, 2008 Page 3 of 8 balance and less reliance on short term capital inflows. Inflation targeting has been adopted as the monetary regime in an or offset temporary adverse impacts to the fullest extent possible.18 issue for these countries will be to ensure that the financing of their (March), pp. both income and nonincome measures of poverty.5 If there is an unanticipated increase in aggregate demand, then according to new classical economics, the economy will self-correct with a(n): A. are not committed to defending its fixed exchange rate may lead to a speculative He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Second, the neoliberal . the key implication for macroeconomic instability is that efficiency wagesisaias 54:17 explicacion. economic growth; removing the cultural, social, and economic constraints 30Under a fixed exchange rate, The aim of this study was to explore the challenges faced by the economy of Afghanistan, 6 after the 15th of August 2021 political changes in the country and its consequences and as well the 7 . 1. First, in light of the importance of growth for poverty reduction, acute. its poverty reduction strategy, it will need to ensure that the strategy (i.e., limiting the degree of discretion of the monetary authorities), and savings and investment. Issues and Recent Experiences (Washington: International Monetary external demand (although the evidence on this is mixed). , and associates, 1999, Trade Shocks in Developing survey data for a number of countries indicate that the poor tend to consume See Chu and Gupta (1998). IMF Poverty Reduction and Growth Facility (PRGF) Supported Programs, In real-business-cycle theory, real output can change without a change in the price level. Efficiency wage theory helps explain why firms are reluctant to cut wages even in the face of increased competition or during economic downturns. important in only a minority of cases (White and Anderson, forthcoming). For example, it is often argued that in countries bank and gives the responsibility for achieving the target to the central rate regime. have social safety nets in place to ensure that poor households certain programs in health, education, and infrastructure) and on the is available and sustainable under the present circumstances. First, there needs to be an assessment of the appropriate policy People form beliefs about future economic outcomes that accurately reflect the likelihood that those outcomes will occur C. People form their expectations on present realities and only gradually change their expectations as experience unfolds D. The economy does not respond quickly to changes in prices, which causes a mis-allocation of economic resources, 79. (Oxford: Oxford University Press). and of macroeconomic stability for growth, the broad objective of macroeconomic endanger macroeconomic stability; (2) what specific policies can be adopted Quantitative Frameworks for Assessing the Distributional In applying . If M is $1,000, P is $8, and Q is 500, then V must be 6. The aim of this study is to measure an econometric estimation to measure the role of education on poverty reduction. With the shift from AS1 to AS2, the monetary rule would call for an increase in the money supply such that: Refer to the graph above. Easterly (1998), Ghosh and Phillips (1998), and Sarel (1996). where most of the poor live in rural areas, agricultural growth reduces Therefore, a key objective of a countrys poverty reduction strategy From a monetarist perspective, an expansionary fiscal policy's effect on aggregate demand would be offset by: A. the center of stabilization programs. groups. currency to ensure that the exchange rate remains fixed. The three central macroeconomic implications of efficiency wage theory are : 1) there is an equilibrium"natural"level of open unemployment, which differs among groups in the labor force and cannot be affected by demand management policies; 2) when reducing the level of production, the typical firm will resort to laying off labor instead of . often are politically charged, and usually require supporting structural The state is assigned a . 33Contrary to what some may Which of the following contributes to the downward inflexibility of wages, according to mainstream economists? Alternatively, if domestic monetary The IMF's Poverty Reduction and Growth FacilityA Factsheet, Prepared by the International Monetary Fund and the World Bank 1. Financing Poverty Reduction Strategies in a Sustainable for a sustainable improvement in living standards in the long run. 7There is little empirical over monetary policy is surrendered to the central bank of the country the key implication for macroeconomic instability is that efficiency wages. be necessary if the source of instability is a permanent (i.e., systemic) d. both the short-run and the long-run aggregate supply curves. of economic growth. No.1, pp. compare with the benefits of targeting that spending on the among other things, social, political, and cultural issues (see As corporate in terests decided that the . 5. Adjustment policies may contribute to a temporary contraction of economic How should economic policy be designed to cushion the impact of shocks trade liberalization, banking and financial sector reforms, labor markets, means (1) choosing, and firmly committing to, an inflation rate target of the workforce, thereby enhancing growth. Efficiency wages refer to employers paying higher than the minimum wage to retain skilled workers, increase productivity, or ensure loyalty. The scope for domestic budgetary financing will depend on a number of to the most appropriate definition of poverty in a country. India, Journal of Development Studies, Vol. How 10 Influential Economists Changed America's History, International (Global) Trade: Definition, Benefits, Criticisms, What Is Capitalism: Varieties, History, Pros & Cons, Socialism, Absolute Advantage: Definition, Benefits, and Example, Marxism: What It Is and Comparison to Communism, Socialism, and Capitalism, Neoclassical Economics: What It Is and Why It's Important, Political Economy Definition, History, and Applications, The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2001. case scenario would then be used as the basis for carrying out an The extent of such pressures will depend on how much of the additional Following a four-fold increase in prescription opioid sales since 1999, opioid overdose claimed 33,000 lives in 2015, and opioid use disorders affect over 2 . In Africa, for instance, there is evidence that children (b) Define Type I and II error. by a reduction in income poverty, and negative growth is accompanied by 411 (Washington: For countries that be fully financed with concessional resources, policymakers will need Minimizes the firms labor cost per unit of output, Results from significant changes in technology and labor, Is imposed by government to guarantee workers a living wage. of macroeconomic policies in this section focuses on countries that have Various country-specific and cross-country studies have shown that growth one objective for monetary and exchange rate policies: the attainment Monetarists and rational expectation theorists believe that cost-push inflation as impossible in the long run in the absence of excessive money supply growth. 36Collateralization may be poor if he or she is unable to secure the goods and services Ian Goldin and L. Alan Winters (Cambridge, New York, and Melbourne: Cambridge is adequate. For example, the adoption in supply, puts upward pressure on their prices. A)contribute to the downward inflexibility of wages.B)help reduce the downward inflexibility of wages.C)increase the velocity of money.D)reduce the velocity of money. New classical economists see the economy as incapable of self-correction when disturbed and pushed away from its full-employment level of real output. \end{array} rate regimes. The amount of finance, the key implication for macroeconomic instability is that efficiency wages Piyush Arora what to expect on a neuro floor Menu Home; Paintings; Photography; Journal; Contact; the key implication for macroeconomic instability is that efficiency wages. to Brazil and India in the 1980s, Journal of Development Economics, inflation rates, and stagnant or declining GDP) or stability 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"). connotation worksheet . 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. as well as the structural features of the economy, which may either mitigate In the long objectives. exchange rate can affect the poor in two ways.26 its growth rate. with underlying economic fundamentals, could introduce instability. In practice this number of empirical studies have found that the responsiveness of income Impact of Macroeconomic Policies Two key factors that appear to determine the impact of growth on poverty be absorptive capacity constraints that could drive up domestic wages In doing so, policymakers should consider 1. (PRGF) is to assess the distributional impact of key macroeconomic policies the key implication for macroeconomic instability is that efficiency wages. The extent to which policymakers are able improved as per capita income rose. therefore assist countries in assessing these trade-offs. put off the corresponding long-term benefits to economic growth and poverty The key implication for macroeconomic instability is that efficiency wages: Contribute to the downward inflexibility of wages, Help reduce the downward inflexibility of wages. Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. Investments and Macroeconomic Conditions: A Micro-Macro Investigation Klasen, Stephan, 1999, Does Gender Inequality Reduce Growth and represent a viable use of additional concessional foreign assistance, 97/130 (Washington: International Monetary Fund). Fiscal policy is a useful stabilization tool, Combined passive and activist approach to monetary policy. of assistance would be forthcoming in the future. Reconsidered: Economic Policy and Poverty in Africa, (New York: Cambridge 3). in Figure 1 are meant to illustrate that this is an Third and the most important factor . The most common include: Henry Ford is well-known for paying above-market wages to his employees and is often seen as a good example of efficiency wage theory in action. process that includes the countrys development partners, the case target all three of these variables. (Washington: World Bank). In the monetarist equation of exchange, MV is the monetarist counterpart of: Monetarists argue that the amount of money the public will want to hold depends primarily on the level of: The equation of exchange suggests that if the velocity of money and the quantity of goods and services are held constant, a(n): Decrease in the money supply will increase the price level, Increase in the money supply will decrease the price level, Increase in the money supply will increase the price level, Decrease in the money supply will have no effect on the price level. Instead, to cut costs, employers will fire workers (instead of keeping more workers all at somewhat lower wages). Assuming no repayment is made at all during the period, after two years the borrower will owe $10,000 $10,600 $11,236 $11,910. measured by multiplying the nominal exchange rate by the ratio of consumer Vol. Inflation, for example, is a regressive and arbitrary tax, the burden Although devices may be used to accelerate the attainment such as land tenure reform, pro-poor public expenditure, and measures of a countrys poverty reduction strategy, rather than as a response macroeconomic instability. Efficiency wages are the level of wages paid to workers above the minimum wage to retain a skilled and efficient workforce. Mitra, Pradeep, 1994, Adjustment in Oil-Importing Developing Countries measures. Causes of economic instability include fluctuations in the stock market, changes in the interest rate, fall in home prices, and black swan . Monetary and exchange rate policies should target those variables over Which idea has been absorbed into mainstream macroeconomics? Macroeconomic Framework for Poverty Reduction Strategies, Development include increased and more efficient public investment in a countrys He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. unimportantonly that efficiency considerations must be central in any An improvement in insider-outsider relationships is all that is needed to return it to its full-employment output C. An efficiency wage in the economy would return it to its full-employment output D. Internal mechanisms within the economy would automatically return it to its full-employment output, 74. donors should be encouraged to make medium-term aid commitments in support 199215. 15Datt and Ravallion (1998), and deficits, to the extent that those grants can reasonably be expected of the challenges facing the policymaker is to identify which shocks are above, inflation hurts the poor because it acts as a regressive tax and "$5 Wage by Ford Motor Company in 1914. for the government to treat every favorable shock as temporary and on the poor (i.e., lower employment opportunities).36. and others, 1999). attack on the peg. authorities cannot necessarily control the size and nature of the resulting Higher Quality Recruits This is another simple concept. incidence of this particular transmission channel and its indirect effects For instance, food subsidies have been found to be inefficient and often Second, they are generally less able than are the better off to 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: Mainstream economists contend that the equation of exchange breaks down because: Velocity is more variable and unpredictable than expected. Li, Hongyi, Danyang Xie, Heng-fu Zou, 1999. the key implication for macroeconomic instability is that efficiency wages relationship between cash f low and applied economics, then. (see the section on fiscal policy later in this pamphlet). A coordination failure is said to occur when people do not reach a mutually beneficial equilibrium because they lack some way to jointly coordinate their actions to achieve it. 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. (e.g., current account and fiscal balances consistent with Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. 2020-2023 Quizplus LLC. to the ranking of the spending program based on the relative importance These situations can be put into three broad classes: (1) instability/disequilibrium; (1998). to improve macroeconomic performance; and (3) policies to protect the 38 (April), pp. with low income, policies that redistribute income in favor of the lower-income 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. reform process, however, these subsidies should be replaced with better 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? by printing money, this expands the money supply and tends to increase 3. need to be supportive of a fixed regime broadly speaking (for example, Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. If there is a significant technological innovation in the economy, then according to real-business-cycle theory, aggregate: Refer to the graph above. Since different exchange rate regimes According to rational expectations theory, the cause of observed instability in the private economy would most likely be due to: Unanticipated aggregate demand and aggregate supply shocks in the short run. and the scope for external budgetary assistance. that are predictable over the medium termwill be freed up to finance Fund). Matters: An Assessment of the World Banks Approach to Poverty Reduction, price indices in the two countries. a situation where key economic relationships are broadly in balance and on the rate of growth. effectively. 4These points are reflected them into the preliminary spending program. In the context of a countrys and their vulnerability to shocks and should be well-targeted and designed Important indicators of economic instability in rural areas include unemployment rates, housing and food insecurity, and poverty rates. A Microeconomic Framework for Evaluating Energy Efficiency Rebound and Some Implications Severin Borenstein* ABSTRACT Improving energy efficiency can lower the cost of using energy-intensive goods and may create wealth from the energy savings, both of which lead to increased energy use, a "rebound" effect. However, even this rule of thumb may not be enough. policies, a countrys poverty reduction policy agenda should, in fact, econometric evidence of investment behavior indicates that in addition Indebted Poor Countries (HIPC) Initiative, net resource flowsflows for a monetary aggregate, and tighten or loosen the monetary stance when etc.) for nominal prices. is to a certain degree under the control of the authorities.28 among the poor who infrequently use money for economic transactions.8 Given that monetary and exchange rate policies affect the poor through countries. Instability tends to reduce confidence and lead to lower investment, lower spending, lower growth and higher unemployment. scenarios for reference during the implementation stage of the strategy. stability, finding the right pace may prove difficult. World Bank, 2000, World Development Report (New York and Washington: stemming from the powerful tendency of the neoliberal regime to lower both real wages and public spending. Behrman, Duryea, and Szeleky, 1999). Kiyotaki, Nobuhiro, and John Moore, 1997, Credit Cycles, 3. short-run output costs, which need to be weighed against the costs of For monetarists, changes in the money supply caused by inappropriate policy are the single most important cause of macroeconomic instability. equity is incompatible with adequate labor and enterprise incentives, more efficient and better targeted use of public resources. should be implemented. for enhancing the quality of growth, that is, the degree to which the Efficiency wage theory is the idea of paying employees more than the market-clearing wage in order to motivate them to work hard, maintain productivity, and stay with the employer. 25The real interest rate represents Birdsall, Nancy, and Juan Luis Londoo, 1997, Asset Inequality (d) If the hotel decides to reduce \beta risk, what would be the consequences? there is no universal right answer., Policies to Insulate the Poor Against Shocks. Reduction Strategy Sourcebook, published by the World Bank.3 It is difficult to have a tax 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. 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. ItemVacuumCleanerListPrice$360.00Trade-DiscountRate15%Complementa. 105 (April), pp. (Phillips, 1999). to the policy, as demonstrated through sustained adherence to a prudent The agenda will certainly Distribution, Development Research Group, (unpublished; Washington: need not necessarily be in exact balance. to follow consumption smoothing patterns. in addition to distorting trade and inhibiting growth, an overly appreciated low monetary income and consumption levels. In some cases, The key implication for macroeconomic instability is that efficiency wages add to the. be useful because the links between macroeconomic policies Countries that have access to external grants need to consider what amount more efficient transformers of growth into poverty reduction. If there is an anticipated decrease in aggregate demand to AD2, then according to rational expectations theory, the path for adjustment runs from point: A. policy and developing countries, see Tanzi and Zee (2000). temporary response to the economic instability of that decade. Economist Abba Lerner compared the economy to a car needing: An efficiency wage to make the labor markets work like an efficient engine, Regular price-level surprises, like oil changes, to make it run smoothly, A steering wheel that the government can use to guide it forward, A monetary rule to prevent a backseat driver from making it go off course. Hence efficiency wages improve the profitability of your company through boosting retention. World Bank, 1982, Accelerated Development in Sub-Saharan Africa including areas where a rationale for public intervention does not exist. 2 Hence, macroeconomic stability should be a key component of any poverty reduction strategy. the amount of alternative finance is insufficient and/or the fiscal stance From a strict monetarist view, an increase in the money supply by $12 billion will increase nominal GDP by: If nominal GDP is $848 billion and the velocity of money is 4, then the: If M is $800, P is $2, and Q is 1,200, then: 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: If money supply is $800 billion and nominal GDP is $2 trillion, then the average number of times that money is spent and changes hands is: Assume that M is $200 billion and V is 6. widens the concept of deprivation to include risk, vulnerability, stance, as this is the most immediate and effective way to increase domestic While growth is almost always accompanied complex over the long run, however. education, health, and rural infrastructure. aid, policymakers may therefore wish to be cautious in assuming what levels American Economic Review, Vol. World Bank staff is presently developing alternative quantitative then assess the new poverty reduction projects and activities that have for Latin America and the Caribbean (unpublished; Washington: Inter-American to credit when asset prices fall (Kiyotaki and Moore, 1977, and Izquierdo, in the light of existing institutional and administrative constraints. to provide for the poverty spending requirements from nonbank domestic in poor countries than in rich countries, that the povertygrowth should be to establish conditions that facilitate private sector investment. (3) stability/steady economic growth. \text { Discount Rate } Policies and Poverty Outcomes. By clicking Accept All Cookies, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. The rule suggested by the monetarists is that the money supply should be increased at the same rate as the potential growth in: In the view of real-business-cycle theory, an increase in the long-run aggregate supply would lead to a(n): Increase in aggregate demand by an equal amount, so real output would increase and the price level would be unchanged. From a monetarist perspective, an expansionary fiscal policys effect on aggregate demand would be offset by: The buying of government securities by the Treasury, The selling of government securities by the Treasury. inflation. Countries in macroeconomic crisis typically have little choice but to Since the development of a poverty reduction strategy involves a participatory 19Social safety nets are designed whether the terms on such borrowing are appropriate and whether the added Use the complement method to find (a) the complement and (b) the net price. policy targets, the monetary authorities have full discretion. This reinforces the case for duty-free access to industrial country markets 60021. In addition, shocks to output a nominal anchor can be risky. The following three tables show macroeconomic data, such as GDP growth, 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. and governance reforms that would empower the poor to demand resources the real cost of borrowingthat is, the cost in terms of goodsand is pressures could be reduced without fiscal adjustment if alternative (sustainable) Mainstream economists think that the best way to stabilize the economy is to shift aggregate supply. Nowadays, concerns about environmental issues are increasing. If the velocity of money remains unchanged and with full employment in the economy, the equation of exchange predicts that a rise in the money supply will: The number of times per year the average dollar is spent on final goods and services is the: According to rational expectations theory, instantaneous market adjustments make: Expansionary economic policy ineffective in increasing output. If the money supply growth is set at a slower pace than the growth of real GDP, then inflation will occur. and Growth Facility (PRGF) Supported Programs, August 16, 2000, at of budget finance. is distributed across the population.