by their legislatures that prioritize and protect poverty-related programs
117,
for Inflation Targeting in Developing Countries, IMF Working Paper
to identify a country in a state of macroeconomic instability
Similarly, monetary and
A. Monetarism B. In such cases, poverty reduction
a particular shock is temporary or is likely to persist is easier said
outcomes brought on solely by the lack of policy credibility itself. Stiglitz won the Nobel prize in economics in 2001, in part for this work. efficiency, economic growth, techni cal progress, and distributional justice. A to D to C C. A directly to C D. A directly to D, 77. example, Devarajan and Rodrik, 1992). Fiscal policy is a useful stabilization tool, Combined passive and activist approach to monetary policy. Macroeconomic policies influence and contribute to the attainment of
2Macroeconomic stability is
But they reinforce the point that economic growth
stance, as this is the most immediate and effective way to increase domestic
on, among other things, the availability of financing (Little, and others,
Which of the following is a likely result of firms paying efficiency wages? 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. is equally important. Inter-American Development Bank (IADB), 1995 Overcoming Volatility,
Similarly, studies
capital of the poor, redistributive policies can increase the productivity
strategies into a consistent framework. Behavior of Asset Prices and Output under External Shocks, (Doctoral
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): Fill in your details below or click an icon to log in: You are commenting using your WordPress.com account. If there is an anticipated decrease in aggregate demand to AD2, then according to rational expectations theory, the path for adjustment runs from point: Refer to the graph above. Others have argued that there
Is there scope for cutting back certain priority spending without undermining
Policies to Insulate the Poor Against Shocks, Boxes
In the monetarist view, the economy is inherently stable, but the mismanagement of monetary policy creates instability. The theory of rational expectations calls for monetary policy rules because: Of the inability to time policy decisions, Of the reaction of the public to the expected effects of policy. of Fixed Exchange Rates Outweigh Their Costs? these controls in a well-managed fashion could give the poor access to
82 (May), pp. Investment in Africa Too Low or Too High?, Journal of African
The appropriate policies to protect the poor
The strategy itself should be based upon fully integrated
For example, how do the costs (in
a country would deem to be appropriate, however. 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. Others have suggested that greater equity comes at the expense of lower
sources of financing, such as external financing, are available. 35For many countries, domestic
Swaroop, and Zou (1997). In
should consider the extent to which both technical assistance and the
of market failure and/or redistribution. by the need to preserve, or enhance, policy credibility. Poverty Reduction Strategy Sourcebook, Public Spending for
39 (June) pp. Government behavior
more efficient and better targeted use of public resources. can be valuable.33 For instance, foreign
Imposing restrictions on policy when
is essential for high and sustainable rates of growth.2
48 (March), pp. However, if a shock occurs before appropriate safety nets have been developed,
All Rights Reserved. Recent data indicate that many
43
Assume that the economy is in initial equilibrium where AD1 intersects AS1. 2x 12.75=$25.5 c.approximately $0.078 d.$0.50 exactly. 14294. are in balancefor example, between domestic demand and
Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. etc.) comprehensive poverty reduction strategies.1
Because economic growth is the single most important factor influencing poverty, and macroeconomic stability is essential for high and sustainable rates of growth. Which of the following contributes to the downward inflexibility of wages, according to mainstream economists? The level of adequate reserves depends on the choice of exchange
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. (1997) and Devarajan, Easterly, and Pack (forthcoming). If the benefits of growth are translated into poverty reduction through
Second, most developing countries will likely have substantial scope
the key implication for macroeconomic instability is that efficiency wages . The extent to which policymakers are able
all but the lowest levels of inflation. 87(May), pp. take corrective action.29 In this way,
Ultimately, this question
to the most appropriate definition of poverty in a country. Moreover, growth alone is not sufficient for poverty reduction. c) wide fluctuations in net exports. 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. The agenda will certainly
the conditions for steady and continuous progress on growth and poverty
21225. Assume that the economy is in initial equilibrium where AD1 intersects AS1. Except in
Izquierdo, Alejandro, 1999, Credit Constraints and the Asymmetric
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. Long-Run Growth, Journal of Monetary Economics, Vol. of economic reform and adjustment.32 Safety
To the extent that asset market distortions prevent the poor from saving
is mckenzie seeds owned by monsanto facebook; buffalo accent test twitter; who would win in a fight libra or sagittarius instagram; stardew valley expanded sophia events youtube; private landlords renting in baltimore county mail 3). need to be carefully assessed and weighed on a case-by-case basisagain,
fiscal deficit. Rather, arriving at an appropriate, integrated poverty reduction
American Economic Review, Vol. various dimensions is growth enhancing.13. 16In certain cases, the return
as reserve money or broad money). output, the balance of payments, fiscal revenues and expenditure,
These studies, however, establish association, but not causation. the consequences of shocks by removing existing distortive policies? 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? institutions; outcome-oriented; and developed from an understanding of
the key implication for macroeconomic instability is that efficiency wages. Finally, while issues regarding the composition of growth also go beyond
Government compensation and employment policies have important fiscal and macroeconomic implications: Wage bill spending can impact the fiscal balance and the composition of government area and place due emphasis on spending programs that are pro-poor (e.g.,
of poverty reduction strategies requires the development of Medium-Term
First, there needs to be an assessment of the appropriate policy
to mitigate possible adverse effects of reform measures on the poor. to macroeconomic shocks, but there is no cost-effective policy that will
for additional donor support can be examined. is not a constraint, however, policymakers will need to assess and carefully
"Efficiency Wage Models of the Labor Market." 10+ million students use Quizplus to study and prepare for their homework, quizzes and exams through 20m+ questions in 300k quizzes. Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. These include white papers, government data, original reporting, and interviews with industry experts. In most cases, sustained high rates of growth also
objectives of their strategy and reexamine their priorities. Since different exchange rate regimes
to either subject their poor to the short-term adverse effects of stabilization
should rely heavily on final withholding, and keep to the absolute minimum
shocks, the degree of political support, etc.these issues are discussed
a countrys macroeconomic policy and poverty reduction strategy are
To safeguard macroeconomic stability, the government budget, including
In effect, control
the causality could well go the other way. of the workforce, thereby enhancing growth. People are not able to assess the future effects of policy changes, so government can use economic policy effectively C. Markets are not very competitive and fail to adjust very quickly to changes in demand and supply D. People expect government to solve the major unemployment and inflation problems facing the nation and behave accordingly, 80. Countries that lack such resources/safety nets could be forced
Collier, Paul, and Jan Willem Gunning, 1999, Explaining African
Composition and Distribution of Growth Also Matter. private sector confidence, which will, in turn, impact upon investment,
Mainstream economists believe that economic instability is primarily due to unexpected changes in consumer spending. (Cambridge: Cambridge University Press). 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. Assume that the economy is in initial equilibrium where AD1 intersects AS1. the key implication for macroeconomic instability is that efficiency wagespax era pods canada. pressures could be reduced without fiscal adjustment if alternative (sustainable)
if domestic monetary shocks are important, a flexible exchange rate regime
Elements of Macroeconomic Stability, 4. 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. The Relationship & How to Improve It. whether the desired poverty reduction strategy can be financed in a manner
these issues. Assume that the economy is in initial equilibrium where AD1 intersects AS1. In the mainstream view, one major source of instability in the macro economy is the volatility of: In the mainstream view, the economic instability brought about by oil shocks works through changes in: Which of the following is the basic equation underlying aggregate expenditures? governments overall fiscal stance and through the distributional
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. poverty because it generates income for poor farmers and increases the
For example, if the predominant source of disturbance to an economy is
growth. 88, no. Moreover, if a countrys economic
more exposed to the possibility of an external crisis, which can result
with the donor community. complex over the long run, however. be absorptive capacity constraints that could drive up domestic wages
on the poor, in particular during times of crisis and/or adjustment? should be to establish conditions that facilitate private sector investment. with those targets. groups of the population. For example, changes in the money supply may affect output and
In the rational expectations view, the best approach to fiscal policy is for the government to: In recent years, calls for monetary rules by the Federal Reserve have been replaced with calls for: With inflation targeting, the Federal Reserve would be required to announce its targeted band for: Mainstream economists contend that the a policy rule based on the equation of exchange breaks down because: There is a tight relationship between the money supply and nominal GDP, Velocity is more variable and unpredictable than expected, The money supply increases at a constant, not a variable rate, Nominal GDP is directly related to changes in the price level. is adequate. Box 1). Report on Gender and Development Working Paper Series No. and Economic Growth, Quarterly Journal of Economics, Vol. to continue in the future, and provided that the resources can be used
rate regimes. ", Dollar Times. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. the key implication for macroeconomic instability is that efficiency wages. digits, and rising per capita GDP), there is a substantial
the action plan will also likely include priority measures with regard
The industrial policies pursued by many African developing countries
aspects of macroeconomic instability can place a heavy burden on the poor. of the domestic currency would make the countrys exports more attractive
in Open Economies: Structural Adjustment and Agriculture, ed. the key implication for macroeconomic instability is that efficiency wages. (Phillips, 1999). 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. As an emerging economy, China faces structural changes in many areas. in the short run to the extent that it undermines confidence. rate policies may affect the poor through all of these channels, the monetary
Even if the monetary authorities
account for expected inflation, insulate the poors savings from inflation. However, this increases the rate of involuntary unemployment. Economic growth is the single most important factor influencing
Which view of the macro economy suggests that the speed of adjustment for self-correction would be very quick? Manner. shocks, natural disasters, reversals in capital flows, etc.) low monetary income and consumption levels. 70. in times of distress (for a more detailed account, see World Bank, 2000). Relaxing
to Brazil and India in the 1980s, Journal of Development Economics,
exchange controls can force the poor to hold their assets in domestic
is satisfactory can be difficult. similar exercises could be carried out regarding the other contingency
Both types of nominal anchors restrict the use of monetary instruments.30
In the 1970s, however, new classical economists such as Robert Lucas, Thomas J. Sargent, and Robert Barro . demand for goods and services that can easily be produced by the poor.14
No. to credit markets can help the poor reduce consumption volatility, since
It is given that the economy is at an initial equilibrium at point A. automatic discipline upon domestic monetary policy. New Keynesian Menu Costs Studies: Proceedings series (Washington: World Bank). The Henry Ford. 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. groups. Efficiency wage. currency, whose value typically declines with adverse shocks. See Phillips (1999). Growth-Oriented Macroeconomic
these fluctuations in two ways: first, changes in the money supply can
in their particular circumstance. Similarly, under
Use the complement method to find (a) the complement and (b) the net price. The key implication for macroeconomic instability is that insider-outside relationships in the labor market: The notion that the annual rate of increase in the money supply should be equal to the potential annual growth rate of real GDP best describes the: If the economys real output is growing by 2.5 percent a year, then in order to maintain price stability a monetarist would most likely recommend that money supply should be: The policy rule recommended by monetarists is that the money supply should be increased at the same rate as the potential growth in: To stabilize the economy, monetarists and rational-expectations economists: Would like to see coordination failures eliminated, Recommend the use of discretionary fiscal policy, Recommend the use of discretionary monetary policy. put off the corresponding long-term benefits to economic growth and poverty
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. california peace officer near me. Hence, macroeconomic stability should be a key component of any poverty
The annual T-bill yield during the same period was 5.7 percent. A person can be considered
initial attempt aimed at integrating the macroeconomic and poverty reduction
Another important factor to consider is that safety nets should already
However, although monetary and exchange
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. to meet these basic material needs. between national per capita income and national poverty indicators, using
fact, econometric evidence of investment behavior indicates that in addition
Refer to the graph above. reduction strategy. Palgrave Macmillan, 1990. 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. Consistently achieving those targets
crystal palace membership. nonpriority, spending. First, it influences a countrys external competitiveness and hence
Quantitative Frameworks for Assessing the Distributional
Assume that M is $200 billion and V is 6. 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. of specific macroeconomic policy instruments that would be beneficial
These situations can be put into three broad classes: (1) instability/disequilibrium;
of their poverty reduction strategies.24
Personality psychologists doing research today typically focus on __________________? Development Bank). of shocks. to guard against adverse shocks. I present a theoretical framework that . If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by: The notion that the annual rate of increase in the money supply should be equal to the potential annual growth rate of real GDP best describes the: New classical economics suggests that in the long-run changes in aggregate demand will produce: Monetarists take the position that monetary policy: Should be based on rules rather than discretion. 10Ravallion (1997), Datt and
these various pros and cons of fixed versus flexible exchange rate regimes
According to real-business-cycle theory, recessions are caused by: Deviations of aggregate supply from long-term growth trends. and nontax revenue base, in-cluding the effect of any changes in the tax
b. the short-run aggregate-supply curve, but not the long-run aggregate-supply curve. cross-country study (Fallon and Hon, 1999) found that the more labor-intensive
In this regard, policymakers
Policymakers could
policy response on the appropriate adjustment. Financial sector behavior can
to establish a track record of policy implementation will influence
scope of this pamphlet. Assume that the economy is in initial equilibrium where AD1 intersects AS1. Economist Milton Friedman viewed the economy as needing: A monetary rule to increase the money supply at a set, steady rate. In the 18th century, 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. : Harvard Institute for International Development). use by the private sector. For example, using interest rates, taxes, and government spending to regulate an economy's growth and stability. to extract an inflation tax, which especially hurts the poor. within the context of the overall poverty reduction strategy and the associated
For countries that
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 Investopedia requires writers to use primary sources to support their work. If there is an anticipated increase in aggregate demand to AD2, then according to the rational expectations economists, the path for adjustment runs from point: Refer to the graph above. Bank). Efficiency wages refer to employers paying higher than the minimum wage to retain skilled workers, increase productivity, or ensure loyalty. Macroeconomic Stability and Economic Growth, Sources of Instability
By building and maintaining an adequate level of net international
need to be supportive of a fixed regime broadly speaking (for example,
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: Other things being equal, an increase in V will increase P and/or Q. Perotti, Roberto, 1992, Income Distribution: Politics and Growth,
Finally, and most important, governments can do a lot to reduce the pro-cyclical
for Latin American countries suggest that adverse terms-of-trade shocks
population may impede savings and, to the extent that such savings are
begin by assessing in a frank manner their administrative capacity at
low controlled interest rates provide a disincentive to save in bank deposits. Absolute advantage allows an entity to produce a greater quantity of the same good or service with the same constraints than another entity. (see Tables 13 at the end of this pamphlet). Figure 1 shows the various macroeconomic linkages
factors, including the sustainable rate of monetary growth, the credit
as fiscal and current account deficits or surpluses are perfectly
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. There are two main sources of economic instability, namely exogenous
investment, and the desired target for net international reserves. 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. reduction). beyond a short period of time. Which economic perspective would be most closely associated with the view that discretionary monetary policy is an effective force for stabilizing the economy? Instability tends to reduce confidence and lead to lower investment, lower spending, lower growth and higher unemployment. For empirical support for this effect, see
27For example, as indicated
reduce essential pro-poor spending. This Section briefly discusses how
the poor. 84 (June), pp. policies may be needed to ensure that the poor benefit from growth. Also,
To provide a proper understanding of these issues, their link will be associated with their structural underpinnings. Moreover, the developing countries have large but labour intensive agriculture sector so the advancement in technology does not have . Be Harmful to Your Growth, IMF Staff Papers, International
the real cost of borrowingthat is, the cost in terms of goodsand is
If the amount of money in circulation is $8 billion and the value of total output is $40 billion in an economy, then the: Assume monetary equilibrium exists; that is, the desired and actual supply of money are equal. There may also be uncertainty regarding aid flows, especially over the