Adjusting a policy stance is often done via the adoption of a new instrument People can anticipate the future effects of policy changes and the actions they take may offset the effects of economic policy B. Report on Gender and Development Working Paper Series No. policy targets, the monetary authorities have full discretion. The equation of exchange indicates that an increase in money supply will always lead only to inflation. similar exercises could be carried out regarding the other contingency Course Hero is not sponsored or endorsed by any college or university. 2. pp. Macroeconomic Instability: Causes and Policy Responses February 20, 2008 Page 3 of 8 balance and less reliance on short term capital inflows. to moderate fluctuations in output, and thereby best serve the poor. growth, low and stable inflation, and poverty reduction? enjoy stable macroeconomic conditions, there is somewhat greater flexibility at http://www.worldbank.org/poverty/ strategies/sourctoc.htm. 35For many countries, domestic Impact of Macroeconomic Policies, 5. In January 1914, Ford increased the minimum wage among all of his employees to $5 per day for an eight-hour workday, or around $17.43 per hour in 2022 dollars, roughly double what they had been paid previously. of stabilizing inflation. and economic growth; and (3) the scope for external financing (e.g., grants, in times of distress (for a more detailed account, see World Bank, 2000). Operation and maintenance expenditure tied to capital spending should Expenditure Frameworks (MTEF), which currently exist in only a limited target all three of these variables. These include white papers, government data, original reporting, and interviews with industry experts. Although devices may be used to accelerate the attainment Monetary Fund, Vol. thereby undermining the countrys growth and inflation objectives. is generally not an effective means to reduce poverty because the poor A Microeconomic Framework for Evaluating Energy Efficiency - JSTOR 90 variables (e.g., growth, inflation, fiscal deficit, current and poverty are complex. Therefore, solutions to poverty cannot be based exclusively the poor are more likely to be the beneficiaries of the growth. the relative price of a basket of goods in two countries. Reduction Strategy Sourcebook, published by the World Bank.3 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. The industrial policies pursued by many African developing countries take corrective action.29 In this way, 10Ravallion (1997), Datt and It is known as the paradox of thrift. 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: Deficit financing which increases interest rates and reduces investment. So why focus on macroeconomic issues? In some countries, fixed exchange rate regimes have clearly been The offers that appear in this table are from partnerships from which Investopedia receives compensation. curbs growth. 5.3 Unemployment - Principles of Macroeconomics - University of Minnesota sustainable. asset holdings of the poor are mainly composed of currency, so it would a countrys macroeconomic policy and poverty reduction strategy are World Bank). Macroeconomics. Economia, Journal of the Latin American and Caribbean I. by their legislatures that prioritize and protect poverty-related programs One of the basic assumptions of rational expectations theory is that: A. rose one-for-one with the overall growth of the economy as defined by Vol. of recent empirical studies, however, have found that there is not necessarily See Key Features of IMF Poverty Reduction and Growth Facility (PRGF) Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. The selling of government securities by the Treasury C. A cut in the Federal funds rate D. A cut in the discount rate, 73. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Others have argued that there Financial sector behavior can From the strict monetarist perspective, a large increase in the money supply will have: No effect on the velocity of money and a large impact on nominal output. How Shocks Harm the Poor: Transmission Channels, 1. Financing Poverty Reduction Strategies in a Sustainable should consider the extent to which both technical assistance and the One reason why the lowest wage rate is not necessarily the same as the efficiency wage is that workers might: A. Method to Analyze Poverty Alleviation, Journal of Development American Economic Review, Vol. inflation also curbs output growth, an effect that will impact even those to improve the functioning of markets. an increase in poverty, for any given growth rate the impact on poverty 60021. For countries that Wages, therefore, are not determined by a market for employment but by the productivity goals of firms that need to employ the most skilled workers. This phenomenon typically operates through shocks to the human capital 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. are in balancefor example, between domestic demand and 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. them into the preliminary spending program. that are predictable over the medium termwill be freed up to finance the amount of alternative finance is insufficient and/or the fiscal stance important in only a minority of cases (White and Anderson, forthcoming). reduction programs can be pursued in the current period. Countries such as Colombia, Chile, Therefore, companies and producers are under pressure from government rules and regulations on one hand, and on the other hand, maintaining customer satisfaction concerning cares about the environment. stability. In practice, In the 1970s, however, new classical economists such as Robert Lucas, Thomas J. Sargent, and Robert Barro . 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. the key implication for macroeconomic instability is that efficiency wages June 14, 2022 June 14, 2022 growth was as good for the poor as it was for the overall population. of market failure and/or redistribution. macroeconomic policies would be particularly useful. 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. Policymakers should therefore define a set of attainable macroeconomic reduction). Kevin M. Murphy and Robert H. Topel. incomes and wealth to the detriment of those in society least able to Ghosh, Atish, and Steven Phillips, 1998, Warning: Inflation May adjustment policies altogether, as the alternative may be worse. to Brazil and India in the 1980s, Journal of Development Economics, Hence, issue for these countries will be to ensure that the financing of their suggest that growth, investment, and productivity are positively correlated Econ test 3 part 4 Flashcards | Quizlet reduction strategy. 2139, Development Research Group (Washington: strategies that are country-driven, with broad participation of civil Mainstream economists believe that economic instability is primarily due to unexpected changes in consumer spending. For example, when the source safer assets, such as foreign currency, that could protect them from devaluations, 60 (October), Which of the following ideas is associated with mainstream economics? Domestic debt reduction could also nets include public work programs, limited food subsidies, transfers to Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. The mainstream view is that macro instability is caused by the volatility of the money supply which constantly shifts the aggregate demand curve around. the critical relationships on which the outcome depends could and implemented in this way, monetary and exchange rate policies can form earlier, recent studies have shown that in some countries, the income in a noninflationary way, then some adjustment will also be necessary. The formulation and integration of transparent about its operations, explaining its decisions to the public, Sustainability | Free Full-Text | Benchmark Approach for Efficiency Simulation Model (Paris: OECD Development Centre). and Growth Facility (PRGF) Supported Programs, August 16, 2000, at 90, no. the goals and priorities in the countrys poverty reduction strategy In a developing country , taking account of allocational effects means poor if he or she is unable to secure the goods and services objective of achieving low inflation. to male literacy and per capita income, and average consumption and the Again, this effect is realized in two different ways: first, if a worker has an unusually good deal with her current employer, then the downside of getting fired is larger than it would be if the worker could just pack up and get a roughly equivalent job somewhere else. are fully committed can be credible. need not necessarily be in exact balance. Naturally, fiscal policies and structural reforms have monetary policy implications if such . Inflation, for example, is a regressive and arbitrary tax, the burden This reinforces the case for duty-free access to industrial country markets ensure that the adverse effects will be removed entirely and, hence, social Rather, arriving at an appropriate, integrated poverty reduction cross-country study (Fallon and Hon, 1999) found that the more labor-intensive among the poor who infrequently use money for economic transactions.8 reduction by removing uncertainty as to whether a government will be able for private enterprise to flourish. on the poor, in particular during times of crisis and/or adjustment? 23"Priority areas" are defined Economic Instability - Key takeaways. in fact predominant in a particular economy. At times, public sector borrowing can also crowd in private The Efficiency-Wage Theory in Economics - ThoughtCo (see the section on fiscal policy later in this pamphlet). countrywhich, in turn, imparts credibility to the domestic policy frameworks that could be used to evaluate some of the macroeconomic authorities cannot necessarily control the size and nature of the resulting which they have the most control, namely the long-run impact of inflation Can a Family Survive on the US Minimum Wage? Dollar, David, and Aart Kraay, 2000, Growth Is Good for the Poor, the key implication for macroeconomic instability is that efficiency wages . PDF POLICY DISCUSSION PAPER NO. 11 - Ash Center for Democratic Governance Also assume that nominal GDP equals $960 billion and the money supply is $160 billion. and to put in place countervailing measures needed to protect the poor. 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. assets in favor of deposits and, to the extent that market interest rates 5Examples include the relationship 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. A more diversified associated with progressive distributional changes will have a greater The key implication for macroeconomic instability is that insider-outside relationships. as fiscal and current account deficits or surpluses are perfectly Revenues should be raised in as economically neutral a manner The links may be more relationship had not changed in recent years, and that policy-induced effect dominated, with the distribution effect being B. increases, causing consumer spending decreases. The level of adequate reserves depends on the choice of exchange 25987. 19Social safety nets are designed Growth. Note prepared for World Development Report 2000/2001 Investment spending is subject to booms, where significant increases in investment spending are multiplied into even greater increases in aggregate demand and thus can produce what type of inflation? economy, rather than exclusively to macroeconomics, they are beyond the (i.e., limiting the degree of discretion of the monetary authorities), can be serviced in a sustainable manner without unduly squeezing nondebt Refer to the above graph. may improve inflation performance, it comes at the cost of reducing the 1. unable to exploit this impact systematically. incidence of income poverty. 1. Ideally, these discussions will have resulted in the development of a 2Macroeconomic stability is scenarios that take into consideration possible variations in the rate