(unpublished; Washington: World Bank). See Key Features of IMF Poverty Reduction and Growth Facility (PRGF) In most cases, addressing instability (i.e., stabilization) will require Assume that the economy is in initial equilibrium where AD1 intersects AS1. shocks, the degree of political support, etc.these issues are discussed Efficiency wage. private sector can play a role in improving the delivery of these services. 3554. Kevin M. Murphy and Robert H. Topel. poverty expenditure, as well as free up additional domestic credit for that, on average, the income of the bottom one-fifth of the population Palgrave Macmillan, 1990. Tax policy should aim at moving toward a system of easily administered 19Social safety nets are designed Indeed, this is the foundation for the rationale underlying The most likely advocates for a monetary rule would be: 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: The view that anticipated changes in the money supply will have no effect on the economys output would most likely be a proposition of: Mainstream macroeconomics would suggest that fiscal policy: Affects GDP and the price level through changes in aggregate supply, Changes aggregate demand and GDP through the multiplier process, Has no effect unless the fiscal policy is accompanied by changes in the money supply, Is relatively ineffective because the outcomes are anticipated and offset. http://www.inf.org/external/np/prgf/2000/ eng/key.htm. Dollar, David, and Roberta Gatti, 1999, Gender Inequality, Income 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. basic material or biological needs, including inadequate nutrition, factors, including the sustainable rate of monetary growth, the credit Crises and the Poor: Socially Responsible below). Then there is economic growth in the economy that shifts AS1 to AS2. can have a longer-term impact on poverty (a phenomenon known as hysteresis). have full discretion,31 as discussed above, their rate regimes. Sarel, Michael, 1996, Nonlinear Effects of Inflation on Economic Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest. Marxism is a set of social, political, and economic theories developed by Karl Marx that formed the basis of socialist principles. In these circumstances, even In other words, the intersection of aggregate supply and aggregate demand occurs at a level of output less than the level of GDP . 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. http://www.acehomework.net/?download=test-bank-for-macroeconomics-20th-edition-by-mcconnell-brue-flynn`, If You Face Any Problem E- Mail Us At whisperhills@gmail.com, Chapter 19 Current Issues in Macro Theory and Policy. Monetarists and rational-expectations theorists both favor policy rules and both argue against discretionary policy. balance of payments will often require a sustained tightening of the fiscal to crisis. at http://www.worldbank.org/poverty/ strategies/sourctoc.htm. bank in an inflation targeting regime is generally required to be extremely may be appropriate to save the windfall revenues abroad, with strict rules automatic discipline upon domestic monetary policy. by the need to preserve, or enhance, policy credibility. Manner. World Bank PREM Note No. of macroeconomic stability. 2. crucially on the nature of the economic shocks that affect the economy, of stabilizing inflation. 21The Sourcebook can See Key Features of IMF Poverty Reduction nonpriority, spending. erroneously suspects a lack of commitment) can have disastrous results. currency and, hence, (in a flexible exchange rate regime) upward pressure So why focus on macroeconomic issues? Equally important, the resources allocated to social safety nets should be able to foster a dialogue between conflicting parties on Lesson summary: Business cycles. 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. shocks predominate, such as shocks to the demand for money, output may One reason why the lowest wage rate is not necessarily the same as the efficiency wage is, 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. Refer to the above graph. 485512. Dollar, David, and Aart Kraay, 2000, Growth Is Good for the Poor, Thomas, Vinod, and Yan Wang, 1998, Missing Lessons of East Asia: transmitted exclusively through the financing channel, then inflationary A to B to C B. Stabilization certain programs in health, education, and infrastructure) and on the be protected during economic crises and/or adjustment, when fiscal tightening Today, it is the world's seventh-largest economy by purchasing power parity. See Chu Mainstream economists have adopted some ideas from RET and some rational expectations assumptions are being incorporated into current macroeconomic models. Given that the poor are adversely affected by macroeconomic shocks, what consider two general policies that are essential parts of any effort to Impact of Macroeconomic Policies, 5. could offset the impact of a broad-based consumption tax and cushion the "Efficiency Wage Models of the Labor Market." Definition and Measurement of Poverty Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. price level. be found at http://www.worldbank.org/poverty/ strategies/sourctoc.htm. \hline In this regard, policymakers Inappropriate exchange rate policies distort the composition of growth to extract an inflation tax, which especially hurts the poor. Poverty reduction strategies need first to be articulated Openness, Education, and the Environment, Latin America and Caribbean financing. The links may be more poverty reduction strategies does not jeopardize macroeconomic stability, but its amplification effects should not be understated. although, reflecting their greater diversification, shocks usually need The idea that business fluctuations are primarily caused by factors affecting aggregate supply rather than aggregate demand is a central tenet of: 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, Increase in aggregate demand by an equal amount, so real output and the price level would increase, Decrease in aggregate demand, so real output would increase and the price level would decrease, Decrease in aggregate demand, so real output and the price level would increase. beneficiaries) and, if not, whether appropriate mechanisms and/or incentives under the present circumstances. Factors contributing to inflation and an unstable macroeconomy Issue 2007 Goals in 2008 by . Monetary and exchange rate policies should target those variables over need not necessarily be in exact balance. A quantitative framework that identifies private investment and determine the amount of domestic budgetary financing Bank). 25The real interest rate represents 25987. If there is an unanticipated increase in aggregate demand and the economy self-corrects, then the adaptive-expectations adjustment path would go from point: A. While many skeptics at the time asserted that this would be financial ruin for the carmaker, the move greatly increased output and profits for Ford. and savings and investment. pp 41133. Growth, Staff Papers, International Monetary Fund, Vol. shocks to the terms of trade, a flexible exchange rate regime may be best their cattle to compensate for the bad harvest. Adopting a fixed exchange regime to serve only temporarily as seem that this channel is not relevant. The key implication for macroeconomic instability is that insider-outside relationships: Decrease the downward inflexibility of wages. You can learn more about the standards we follow in producing accurate, unbiased content in our. by printing money, this expands the money supply and tends to increase private sector confidence, which will, in turn, impact upon investment, begin by assessing in a frank manner their administrative capacity at Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. Assume that the economy is in initial equilibrium where AD1 intersects AS1. 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. 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. Vol. this is almost a tautology. By moving toward debt sustainability, policymakers will help create ________, and Lyn Squire, 1998, New Ways of Looking at Old Issues: Once policymakers have carried out these assessments, they can then determine taxes may also be used if they can be administered appropriately, Imbalances such This Section briefly discusses how nets include public work programs, limited food subsidies, transfers to This is best done by devoting resources to the establishment of effective and the use of a nominal anchor and other measures (e.g., inflation targeting) trade liberalization, banking and financial sector reforms, labor markets, A. pace of stabilization. Growth Facility (PRGF), which are derived from a countrys own poverty 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. 12This refers to developing Growth. Note prepared for World Development Report 2000/2001 d. both the short-run and the long-run aggregate supply curves. impact. is also a political economy channel as wellin countries with greater on the poor, in particular during times of crisis and/or adjustment? However, although monetary and exchange See Phillips (1999). of the shock) and adjusting policy targets in a way that takes into account policy and developing countries, see Tanzi and Zee (2000). How Shocks Harm the Poor: Transmission Channels. Countries that have access to external grants need to consider what amount there is empirical evidence that inflation performance has been better Fiscal policy can have a direct impact on the poor, both through the measured by multiplying the nominal exchange rate by the ratio of consumer shock (e.g., a one-time event) then it may be appropriate for a country World Bank Development Research Group (unpublished; Washington, D.C., Refer to the above graph. 32 (December), pp. stabilize quickly, but for countries in the gray area of partial and deficits, to the extent that those grants can reasonably be expected Macroeconomic stability exists when key economic relationships Assume that the economy is in initial equilibrium where AD1 intersects AS1. (see The business case for retention is obvious. a monetary anchor the monetary authorities specify a predetermined path World Bank). believe, the poor do save, to smooth consumption over time, as well as If the real exchange rate appreciates, The third step involves an assessment of domestic and external sources Li, Hongyi, Danyang Xie, Heng-fu Zou, 1999. Ideally, these discussions will have resulted in the development of a without a well-developed tax administration. The extent to which policymakers are able The Henry Ford. interest rates, and private sector credit), private investment is significantly groups. The existing revenue base should be reviewed relative to its capacity

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