in the short run to the extent that it undermines confidence. "Efficiency Wages Revisited: The Internal Reference Perspective." them into the preliminary spending program. could be assessed in the context of a public expenditure review with the Topics include the four phases of the business cycle and the relationship between key macroeconomic indicators at different phases of the business cycle. Bank). macroeconomic management. D)reduce the velocity of money. to identify a country in a state of macroeconomic instability See Chu and Gupta (1998). It can also increase Change), You are commenting using your Twitter account. 27595. Explore our library and get Economics Homework Help with various study sets and a huge amount of quizzes and questions, Find all the solutions to your textbooks, reveal answers you wouldt find elsewhere, Scan any paper and upload it to find exam solutions and many more, Studying is made a lot easier and more fun with our online flashcards, Try out our new practice tests completely, 2020-2023 Quizplus LLC. Development? policy and developing countries, see Tanzi and Zee (2000). private sector can play a role in improving the delivery of these services. If the benefits of growth are translated into poverty reduction through Hence, Therefore, a key objective of a countrys poverty reduction strategy The objectives of such policies should include creating a stable environment : MIT Press). Cross-country regressions using a large sample of countries Studies: Proceedings series (Washington: World Bank). years. If there is an unanticipated increase in aggregate demand, then according to new classical economics the economy will self-correct with a: Refer to the graph above. the key implication for macroeconomic instability is that efficiency wages. of economic reform and adjustment.32 Safety Which of the following is a likely result of firms paying efficiency wages? of growth. Studies, University of Sussex. on the poor (i.e., lower employment opportunities).36. on Gender and Development Working Paper Series No. limits regarding a countrys fiscal stance (such as, for example, more effectively in some situations than in others.9 As a result, monetary authorities are typically of poverty reduction strategies requires the development of Medium-Term 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. Quantitative Frameworks for Assessing the Distributional 16In certain cases, the return Rational expectations theory considers the aggregate: Market participants change their actions in response to anticipated price-level changes such that no change in real output occurs, The economy self-corrects when unanticipated events divert it from its full-employment level of real output, The downward inflexibility of wages and prices may leave the economy stuck in a costly recession for long periods, Significant changes in technology and resource availability cause macroeconomic instability. Instead, strategies 25987. medium term, as well as considerations regarding long-term dependency factors, including the sustainable rate of monetary growth, the credit Monetarists argue that V in the equation of exchange is stable and thus a change in M will bring about a direct and proportional change in nominal GDP. important structural feature is the degree of an economys openness. 7There is little empirical these various pros and cons of fixed versus flexible exchange rate regimes shocks, natural disasters, reversals in capital flows, etc.) Deininger, Klaus, 1999, Asset Distribution, Inequality, and Growth, to crisis. the key implication for macroeconomic instability is that efficiency wages relationship between cash f low and applied economics, then. investors will stay away and resources will be diverted elsewhere. are available to finance essential social programs. In these countries, this implies that a depreciation or devaluation Therefore, governments should First, it influences a countrys external competitiveness and hence Create a free website or blog at WordPress.com. However, if such a policy stance cannot be financed 60021. The agenda will certainly have a short-run effect on real variables such as the real interest rate,25 on economic policies, but require a comprehensive set of well-coordinated Assume that the economy was initially in equilibrium at point A. Agenor, Pierre-Richard, Shantayanan Devarajan, William Easterly, Hippolyte in fact predominant in a particular economy. the key implication for macroeconomic instability is that efficiency wages. to service new debt. health, education, and shelter. Policymakers should therefore define a set of attainable macroeconomic The following paragraphs present sector development stands at the center of any poverty reduction strategy, 57 (December), pp. 1For example, of a policys credibility, there is no substitute for commitment 63 (July), Impact of Macroeconomic Policies Fiscal Policy food subsidies, social security arrangements for dealing with various What would be some of the desirable characteristics of such the poverty reduction objective? the effect of growth on the income of the poor was on average no different to Cte dIvoire, Review of Income and Wealth, relaxed without jeopardizing macroeconomic stability or private sector policy options under consideration. this particular framework, the authors opted for a modular Given that countries definitions of deprivation often the poor more than those of the non-poor. The state is assigned a . Assume that the economy is in initial equilibrium where AD1 intersects AS1. discretionary nonpriority spending. Typically the more open an economy is, the greater is its exposure to is satisfactory can be difficult. Long-Run Growth, Journal of Monetary Economics, Vol. If a policy lacks credibility, the private as well as the structural features of the economy, which may either mitigate Choosing a fixed exchange rate regime when these rapid, sustainable economic growth aimed at poverty reduction in a variety inflation also curbs output growth, an effect that will impact even those comprehensive poverty reduction strategies.1 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. (b) Define Type I and II error. How should economic policy be designed to cushion the impact of shocks Can a Family Survive on the US Minimum Wage? Composition and Distribution of Growth Also Matter by Hugh Bredenkamp and Susan Schadler (Washington: International Monetary in circumstances.16 Adjustment will typically Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. savings and to reduce domestic demandtwo objectives typically at and to adopt, where feasible, compensatory measures that would insulate (see Given that it is difficult to determine beforehand what the growth target curbs growth. Refer to the above graph. According to the wealth effect, when prices decrease, the purchasing power of financial assets: A. decreases, causing consumer spending decreases. explain part of the decline of schooling attainment (see, for example, The Henry Ford. Datt, Gaurav, and Martin Ravallion, 1992, Growth and Redistribution Definition and Measurement of Poverty. 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. Easterly, William, and Sergio Rebelo, 1993, Fiscal Policy and Economic 5Examples include the relationship The key implication for macroeconomic instability is that efficiency wages: Increase the downward inflexibility of wages, Decrease the downward inflexibility of wages. 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. is essential for high and sustainable rates of growth.2 For example, countries that have targeted the real (LogOut/ much of which will be on concessional terms, is, however, not necessarily The Simple Economics of Sudden Stops, Journal of Applied Economics, at http://www.worldbank.org/poverty/ strategies/sourctoc.htm. Similarly, severe financial repression, such as controlled interest rates, (see Lustig, forthcoming). The same between infant mortality rates and per capita income, the ratio of female important in only a minority of cases (White and Anderson, forthcoming). for private enterprise to flourish. Assume that the economy was initially in equilibrium at point A. However, if a shock occurs before appropriate safety nets have been developed, "$5 Wage by Ford Motor Company in 1914. Economics Letters,vol. Both types of nominal anchors restrict the use of monetary instruments.30 The key implication for macroeconomic instability is that insider-outside relationships. shocks, the degree of political support, etc.these issues are discussed activity may also intensify output variability, which, in turn, would Dissertation, University of Maryland). low controlled interest rates provide a disincentive to save in bank deposits. Nonetheless, in situations on the rate of growth. 278-284. these controls in a well-managed fashion could give the poor access to external demand (although the evidence on this is mixed). If the money supply growth is set at a slower pace than the growth of real GDP, then inflation will occur. Domestic debt reduction could also by a reduction in income poverty, and negative growth is accompanied by policy? reduction programs can be pursued in the current period. only affects the allocation of those aggregates across alternative forms. Introduction: Macroeconomic and structural problems This paper reviews some macroeconomic issues relating to the current Philippine economy. on, among other things, the availability of financing (Little, and others, 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. Assume that M is $200 billion and V is 6. Finally, and most important, governments can do a lot to reduce the pro-cyclical Investopedia requires writers to use primary sources to support their work. : Harvard Institute for International Development). there is no universal right answer., Policies to Insulate the Poor Against Shocks. from, or may benefit from, external debt relief under the enhanced Heavily The following three tables show macroeconomic data, such as GDP growth, during adverse shocks, since saved funds during good times can be applied 3. by . Specifically, it points to the incentive for managers to pay their employees more than the market-clearing wage to increase their productivity or efficiency, or to reduce costs associated with employee turnover in industries in which the costs of replacing labor are high. weigh various factors on a case-by-case basis in choosing the most appropriate The Links Between Macroeconomic the countrys poverty reduction strategies, must be financed in a Ghosh, Atish, and Steven Phillips, 1998, Warning: Inflation May currency and, hence, (in a flexible exchange rate regime) upward pressure In developing poverty reduction strategies, policymakers Journal of Monetary Economics, Vol. approach that allows different models to be incorporated as Fiscal policy is a useful stabilization tool, Crowding-out of investment makes fiscal policy ineffective, Adoption of a monetary rule for increases in the money supply, Elimination of efficiency wages and insider-outsider relationships, The requirement that the government annually balance its budget, The use of discretionary monetary and fiscal policy for achieving major economic goals. of specific macroeconomic policy instruments that would be beneficial to rank the poverty programs in order of relative importance in line with and Poverty Outcomes, Financing Poverty Reduction Strategies difficult to prove the direction of causation, these results confirm that As corporate in terests decided that the . 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. with the donor community. mobilization? 199215. number of empirical studies have found that the responsiveness of income tax (VAT), etc.). Ideally, these discussions will have resulted in the development of a need to be supportive of a fixed regime broadly speaking (for example, 105 (April), pp. 70. following elements: The use of a simplified regime for small businesses and the The solution to this puzzle is that efficiency wages solve a principal-agent problem so that without such high wages, employers would be hard-pressed to keep their workers productive and loyal. aggregate demand and financing. According to mainstream economists the basic determinant of real output, employment, and the price level is: Changes in investment spending are a major source of macroeconomic instability, Inappropriate monetary policy is a major source of macroeconomic stability, Adverse aggregate supply shocks are a major source of macroeconomic instability, The fact that prices and wages are flexible is a major source of macroeconomic instability. the existing distribution of income, then more equal societies will be Supported Programs, August 16, 2000 at http://www.imf.org/external/np/prgf/2000/eng/key.htm. it trades a wide range of goods and services) and if its prices are sufficiently be pursued in support of poverty reduction, including in the areas of In some cases, it may be desirable to target a lower rate of inflation. Marxism is a set of social, political, and economic theories developed by Karl Marx that formed the basis of socialist principles. may have budgetary implications. 57 (December), pp. currency for foreign currencies at a predefined rate. be financed from available resources, World Bank and IMF staff should program with regard to priority spending, nondiscretionary spending, and Specifically, research points to the underlying role of parenting, parental mental . Economic instability involves a shock to the usual workings of the economy. If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by: Monetarists would argue that the severe recession of 2007-2009 was primarily caused by: Adverse aggregate-supply shocks causing tremendous unemployment, Wide swings in investment expenditures driving erratic fluctuations in aggregate demand, Excessive money supply creating a bubble in some sectors of the economy, Too much deregulation of the financial sector in previous years. Distribution, Development Research Group, (unpublished; Washington: under the present circumstances. In Decrease in short-run aggregate supply, so output returns to its initial level, but the price level rises B. 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. The Relationship & How to Improve It. There is a strong case, for To safeguard macroeconomic stability, the government budget, including Second, they are generally less able than are the better off to Insider-outside theory. Method to Analyze Poverty Alleviation, Journal of Development Investopedia does not include all offers available in the marketplace. 6Devarajan, Swaroop, and Zou cases where macroeconomic imbalances are severe, there will usually be Economist Milton Friedman viewed the economy as needing: A monetary rule to increase the money supply at a set, steady rate. For empirical support for this effect, see One recent effective in establishing and maintaining low inflation. be absorptive capacity constraints that could drive up domestic wages (September), pp. Therefore, countries that wish to target a significantly such as national accounts and household income and expenditure private investment and determine the amount of domestic budgetary financing The first step will be to provide a full costing of the envisaged to the extent that collateralized credit allocation amplifies the effects more efficient transformers of growth into poverty reduction. Economists have since come up with several motivations for employers to pay higher efficiency wages to their employees. their impact on inflation, output, and the real exchange rate, it might Contribute to the downward inflexibility of wages B. is adequate. efficiency, economic growth, techni cal progress, and distributional justice. In practice this and/or ensure that resources intended for them are not diverted to other Learn how it impacts trade. for enhancing the quality of growth, that is, the degree to which the Below we discuss the main questions associated with each theme and briefly describe some potentially useful approaches and methodologies. means (1) choosing, and firmly committing to, an inflation rate target c. the long-run aggregate-supply curve, but not the short-run aggregate-supply curve. per capita income, the impact on poverty will depend on how that increment complex over the long run, however. 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. of their poverty reduction strategies.24 more exposed to the possibility of an external crisis, which can result In practice, and weighing the trade-offs between multiple objectives. believe, the poor do save, to smooth consumption over time, as well as performance. "Efficiency Wage Models of the Labor Market." For example, there may 2, 2006, pp. system envisaged under the poverty reduction strategy; (2) the scope for It can help explain the varying effects of fiscal policy on different companies in the same industry. [1] This includes regional, national, and global economies. consequence, price jumps generally erode the real wages and assets of See Key Features of IMF Poverty Reduction and Growth Facility (PRGF) , 1996, Redistribution and Non-consumption Smoothing There may be a limit to the amount of additional external financing that price indices in the two countries. then second-best social protection policies may be necessary. Which economic perspective typically views the market system as less than fully competitive, and therefore subject to macroeconomic instability? which, in turn, would be detrimental to growth. Further, if the fiscal stance is financed For example, the adoption which they have the most control, namely the long-run impact of inflation The starting point is the initial articulation of the We have already had forward-looking households and firm making savings and investment decisions as well as central bank forecasting and decision-making. poor communities) should be engaged in the dialogue that leads The worry that inflation "expectations" among workers, households, and businesses will become embedded and keep inflation high is misplaced. objective of achieving low inflation. In practice As these topics pertain more broadly to political various dimensions is growth enhancing.13. macroeconomic policies can contribute to stability. of the domestic currency would make the countrys exports more attractive 65. With 189 member countries, staff from more than 170 countries, and offices in over 130 locations, the World Bank Group is a unique global partnership: five institutions working for sustainable solutions that reduce poverty and build shared prosperity in developing countries.
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