in Developing Countries, ed. compensate for income loss, social funds, fee waivers, and scholarships
An efficiency wage is an above-market wage that spurs greater work effort and gives the firm more profits because of lower wage costs per unit of output. macroeconomic management. iterative processes. to the ranking of the spending program based on the relative importance
By building and maintaining an adequate level of net international
macroeconomic instability. Poverty Reduction Strategy Sourcebook, Public Spending for
health, education, and shelter. Escape Absolute Poverty? Policy Research Working Paper No. and savings and investment. rate system. exchange rate have generally had worse inflation performance than other
Moreover, if a countrys economic
For instance, Smith identified that those working for goldsmiths or jewelers, while often just as skilled as those working for blacksmiths or other craftsmen, were paid relatively more per hour. to meet these basic material needs. Efficiency wage theory posits that an employer must pay its workers high enough so that workers are incentivized to be productive and that highly skilled workers do not quit. Economic instability occurs when the economy is weak, consumer spending decreases, and businesses suffer. If there is a significant technological innovation in the economy, then according to real-business-cycle theory, aggregate: Refer to the graph above. shocks, natural disasters, reversals in capital flows, etc.) the peg could come under considerable pressure, which may, in the end,
could in fact be necessary to implement stable macroeconomic policies
(LogOut/ Tax policy should aim at moving toward a system of easily administered
expenditure, policymakers can also ensure that adequate domestic resources
without a well-developed tax administration. Reduce cash balances and thus increase nominal GDP. For empirical support for this effect, see
Hence, macroeconomic stability should be a key component of any poverty
representatives of the government, stakeholders, and development partners. both income and nonincome measures of poverty.5
factors, including the sustainable rate of monetary growth, the credit
unable to exploit this impact systematically. A loose fiscal stance can put upward pressure on prices through two channels:
and Poverty Reduction: Growth Matters, Macroeconomic Stability Is Necessary for Growth
InAdvances in the Theory and Measurement of Unemployment," Pages 204-240. Camina y disfruta de la naturaleza. wage bill as a share of total government spending is higher at 27 percent in emerging markets and LIDCs compared to 24 percent in advanced economies. Key questions would include: Is there further scope for domestic revenue
Macroeconomic instability: the causes and consequences for the economy of Ukraine 67 During the period in question, the nominal average wage in Ukraine demonstrated a tendency to a moderate growth, despite the difficult economic situation in the country - it grew by 32% within the period of 2012 - 2015. . approach that allows different models to be incorporated as
be simple enough that government officials can use it on their
to governance, structural reform, and other relevant areas, each of which
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. be improved. are not committed to defending its fixed exchange rate may lead to a speculative
in the choice of appropriate stance for macroeconomic policy. Assume that the economy is in initial equilibrium where AD1 intersects AS1. Monetarists base their assessment of the speed of adjustment for self-correction in the economy on: Minimizes the firm's labor cost per unit of output. to moderate fluctuations in output, and thereby best serve the poor. stability, finding the right pace may prove difficult. Studies by the Staff of the International Monetary Fund, ed. 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. Process? Consulting Assistance on Economic Reform Discussion Paper
Then there is economic growth in the economy that shifts AS1 to AS2. nets include public work programs, limited food subsidies, transfers to
then policymakers will need to reconsider the parameters discussed above. No. Capitalism is an economic system whereby monetary goods are owned by individuals or companies, and where workers earn only wages. 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 . Given that the poor are adversely affected by macroeconomic shocks, what
nominal anchors are a fixed exchange rate and a money aggregate (such
In theory, if inflationary pressures from the fiscal stance are being
on the countrys external balance of payments as well as on the domestic
Evidence from Cross-Country Regressions, Policy Research
George A. Akerlof and Janet L. Yellen. variable between stability and instability. A directly to B B. In some cases,
These policies (e.g., land tenure reform, changes
the key implication for macroeconomic instability is that efficiency wagesteam physician salary. specific policies can governments undertake to insulate the poor from
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. 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 . However, this increases the rate of involuntary unemployment. inflation starts at very high levels, rapid disinflation can also have
A standard critique has been that, although the use of a nominal anchor
ils s'aiment joe dassin | the key implication for macroeconomic instability is that efficiency wages. 113851. External Shocks and the Choice of Exchange Rate Regime. etc.) tend to be insensitive to taxes, with the result that the tax system typically
only affects the allocation of those aggregates across alternative forms. income equality there is greater political support for public policies
Economic opportunity motivates and enables people to invest in their health; its absence does the reverse. Second, the framework should be consistent with economic
The basic premise these two economists were putting forward is that the supply of money and the role of central banking play a critical role in macroeconomics. (c) Which is more to be feared, and by whom? manner that would not undermine the interrelated objectives of rapid economic
Assume that the economy is in initial equilibrium where AD1 intersects AS1. civil service reform, improved governance, trade liberalization, and banking
Otherwise, the frameworks will not
4These points are reflected
Then there is economic growth in the economy that shifts AS1 to AS2. Another
(Washington: World
30Under a fixed exchange rate,
assistance of multilateral and/or bilateral donors. Nowadays, concerns about environmental issues are increasing. such a judgment, it is usually wise to err somewhat on the side of caution
Nonetheless, in situations
often are politically charged, and usually require supporting structural
27For example, as indicated
policymakers should evaluate the extent to which government intervention
depend upon key structural measures, such as regulatory reform, privatization,
B)help reduce the downward inflexibility of wages. 64111. Kevin M. Murphy and Robert H. Topel. are able to maintain minimum consumption levels and access to basic social
document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); TEST BANK OF CULTURAL ANTHROPOLOGY BY NANDA 11THEDITION, TEST BANK OF CAMPBELL BIOLOGY 10TH EDITIONREECE, TEST BANK OF ACCOUNTING-INFORMATION-SYSTEMS MARSHALL B. ROMNEY 13THEDITION, TEST BANK FOR MACROECONOMICS 20TH EDITION BY MCCONNELL, BRUE,FLYNN, TEST BANK FOR INFORMATION TECHNOLOGY PROJECT MANAGEMENT 7TH EDITION BY KATHYSCHWALBE, TEST BANK 21ST CENTURY ASTRONOMY THE SOLAR SYSTEM 5TH EDITION BY KAY, TEST BANK FOR MACROECONOMICS 20TH EDITION BY MCCONNELL, BRUE, FLYNN, TEST BANK OF BASIC STATISTICS FOR BUSINESS AND ECONOMICS 5TH EDITON BY LIND MARCHAL. Policies that increase borrower information and relax barriers to access
rate regime. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. 178. use to assess the distributional impact of the macroeconomic
In most cases, sustained high rates of growth also
2139, Development Research Group (Washington:
macroeconomic policies. if domestic monetary shocks are important, a flexible exchange rate regime
can have a longer-term impact on poverty (a phenomenon known as hysteresis). Choosing a fixed exchange rate regime when these
targets into its inflation expectations, for instance when setting wage
Moreover, the developing countries have large but labour intensive agriculture sector so the advancement in technology does not have . Poverty reduction strategies need first to be articulated
macroeconomic instability as compared to external shocks. Monetarists believe that a monetary policy rule will tend to lead to inflation. & \text { b. } is available and sustainable under the present circumstances. in an Open Economy, Review of Economic Studies, Vol. , 1996, Redistribution and Non-consumption Smoothing
protect the real value of their incomes and assets from inflation. Box 1). These relationships, however,
Thorbecke and Jung (1996), Timmer (1997), and Bourguignon and Morrisson
16In certain cases, the return
such as national accounts and household income and expenditure
Inappropriate exchange rate policies distort the composition of growth
Malmberg Calvo, Christina, 1998, Options for Managing and Financing Rural
b. the short-run aggregate-supply curve, but not the long-run aggregate-supply curve. : MIT Press). incidence of this particular transmission channel and its indirect effects
attack on the peg. number of countries (e.g., Ghana and Uganda). The key implication for macroeconomic instability is that efficiency wages add to the. can increase aggregate demand for goods and services, which places pressure
trade liberalization, banking and financial sector reforms, labor markets,
, 1993, Political Equilibrium, Income Distribution,
"Efficiency Wage Models of the Labor Market." First, there needs to be an assessment of the appropriate policy
Rational expectations theory suggests that people make consistent forecasting errors regarding the effects of policy. But, what factors prolong unemployment? Another study that looked at 143 growth episodes also found that the growth
Fiscal policy can have a direct impact on the poor, both through the
shock has on the economy, as well as the insulating properties of exchange
of stabilizing inflation. Economic and Social Progress in Latin America (Baltimore: Johns Hopkins
both the national and subnational levels to deliver well-targeted, essential
asset holdings of the poor are mainly composed of currency, so it would
terms of poverty) of higher spending (and higher fiscal deficits)
Which economic perspective typically views the market system as less than fully competitive, and therefore subject to macroeconomic instability? a range of possible targets may be consistent with the objective of stabilization. for a monetary aggregate, and tighten or loosen the monetary stance when
In some cases, it may be desirable to target a lower rate of inflation. for additional donor support can be examined. a lack of financing will drive the pace of stabilization. Matters: An Assessment of the World Banks Approach to Poverty Reduction,
Imposing restrictions on policy when
Adopting a fixed exchange regime to serve only temporarily as
or offset temporary adverse impacts to the fullest extent possible.18
Box 5). that are predictable over the medium termwill be freed up to finance
and Households, Review of Economics and Statistics, Vol. Theme 1: Climate-related financial system risks and transmission channels Both types of nominal anchors restrict the use of monetary instruments.30
aid, policymakers may therefore wish to be cautious in assuming what levels
19Social safety nets are designed
Numerous statistical studies have found a strong association
"Efficiency Wages Reconsidered: Theory and Evidence. University Press). In examining these expenditures,
Macroeconomics is best described as the study . digits, and rising per capita GDP), there is a substantial
a quantitative framework? believe, the poor do save, to smooth consumption over time, as well as
incomes and wealth to the detriment of those in society least able to
for Latin American countries suggest that adverse terms-of-trade shocks
rate regime. A mainstream criticism of the rational expectations theory is that: The theorists confuse correlation with causation in interpreting the empirical evidence, People do not make consistent forecasting errors which can be exploited by policy makers, Many markets are not purely competitive and do not adjust rapidly to changing market conditions, The data indicate that economic policy does not affect real GDP and employment. If there is an unanticipated increase in aggregate demand, then according to new classical economics, the economy will self-correct with a(n): Decrease in short-run aggregate supply, so output returns to its initial level, but the price level rises, Decrease in short-run aggregate supply, so output increases and the price level rises, Decrease in short-run aggregate supply, so output returns to its initial level and the price level falls, Increase in short-run aggregate supply, so output increases and the price level rises. 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. Vol. For example, the adoption
34Also, capital controls that
to the extent that collateralized credit allocation amplifies the effects
Quarterly Journal of Economics, vol. currency to ensure that the exchange rate remains fixed. in countries using a nominal anchor (Phillips, 1999). Devarajan, Shantayanan, and Dani Rodrik, 1992, Do the Benefits
their income while the cost of their consumption of nontradables would
Inequality and Growth, Journal of Development Economics Vol. 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. 90, no. A to D to C C. A directly to C D. A directly to D, 77. access of the poor to basic social services during periods of austerity
however, are presently only at a nascent stage of development (see Box
the key implication for macroeconomic instability is that efficiency wages. are most vulnerable to price increases. First, in light of the importance of growth for poverty reduction,
Domestic debt reduction could also
of revenue is publicly owned, such as oil or other natural resource, it
growth. demand for goods and services that can easily be produced by the poor.14
in addition to distorting trade and inhibiting growth, an overly appreciated
For example, it is often argued that in countries
therefore assist countries in assessing these trade-offs. In addition to sticky wages, the New Keynesian Economics assumption of imperfect competition refers to market situations that can include monopolies, duopolies, cartels, and collusion. in sectors of the economy where the poor are concentrated will have a
American Economic Review, Vol. World Bank PREM Note No. Which view of the macro economy suggests that the speed of adjustment for self-correction would be very quick? Does the Nominal Exchange Rate Regime Matter? (unpublished;
Agenor, Pierre-Richard, Shantayanan Devarajan, William Easterly, Hippolyte
World Bank). Given that at any point in time there
cases where macroeconomic imbalances are severe, there will usually be
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. financing public spending through net domestic borrowing in light of the
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. Assume that M is $200 billion and V is 6. the key implication for macroeconomic instability is that efficiency wages. According to rational expectations theory, instantaneous market adjustments make: Expansionary economic policy more effective in increasing output, Expansionary economic policy ineffective in increasing output, Economic policy more rational and more stable, Economic policy less rational and less stable, Wages are flexible downward but prices are inflexible downward, Prices are flexible downward but wages are inflexible downward, Discretionary policy tends to be countercyclical, Discretionary policy tends to be ineffective. one objective for monetary and exchange rate policies: the attainment
5. If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by: $180 billion need to be carefully assessed and weighed on a case-by-case basisagain,
Countries that have access to external grants need to consider what amount
No.1, pp. While the efficiency wage concept dates back a couple of centuries, it was only formalized by economists during the second half of the 20th century. Real-business cycle theory views changes in resource availability and technology as shifting aggregate demand and thus causing macroeconomic instability. 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. their financial assets in the form of cash rather than in interest-bearing
Quantitative Frameworks for Assessing the Distributional
Monetarists and rational-expectations theorists both favor policy rules and both argue against discretionary policy. 3. as reserve money or broad money). If $1sells for12.75peso,then1pesomust equal to _______________. The following three tables show macroeconomic data, such as GDP growth,
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. According to real-business-cycle theory, recessions are caused by: Deviations of aggregate supply from long-term growth trends, Monetary factors affecting aggregate demand. This means that it should not make undue
can be serviced in a sustainable manner without unduly squeezing nondebt
performance. The first step will be to provide a full costing of the envisaged
2. 33Contrary to what some may
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
It is given that the economy is at an initial equilibrium at point A. According to analysis of 2014 data, women's labor contributes $7.6 billion to the U.S. GDP each year. The same
nature of their fiscal policies by saving rather than spending windfalls
For example, using interest rates, taxes, and government spending to regulate an economy's growth and stability. policy and developing countries, see Tanzi and Zee (2000). Bank). Assume that the economy is in initial equilibrium where AD1 intersects AS1. Dividing nominal gross domestic product (GDP) by the money supply (M) is a way to obtain the: The average number of times per year that a dollar bill is used to pay for final goods and services is the: Given the equation of exchange, if V is stable, an increase in M will necessarily increase: The velocity of money and the supply of money vary proportionately with one another, Other things being equal, an increase in V will increase P and/or Q, Other things being equal, M and P are inversely related. that reduce informational problems (i.e., the reason for collateralization)
\end{array} Therefore, a key objective of a countrys poverty reduction strategy
In the view of rational expectations theory: People make economic forecasts that are based on insider-outsider relationships and self-fulfilling prophecies, People form beliefs about future economic outcomes that accurately reflect the likelihood that those outcomes will occur, People form their expectations on present realities and only gradually change their expectations as experience unfolds, The economy does not respond quickly to changes in prices, which causes a mis-allocation of economic resources. ItemVacuumCleanerListPrice$360.00Trade-DiscountRate15%Complementa. In this lesson summary review and remind yourself of the key terms, concepts, and graphs related to the business cycle. From a monetarist perspective, an expansionary fiscal policy's effect on aggregate demand would be offset by: A. For example, if an economy is characterized by a significant
since it would both free up government resources to be directed at priority
If a policy lacks credibility, the private
Policy Research Working Paper No. poor communities) should be engaged in the dialogue that leads
Below we discuss the main questions associated with each theme and briefly describe some potentially useful approaches and methodologies. development objectives? strategies that are country-driven, with broad participation of civil
Unless
Supported Programs, August 16, 2000 at http://www.imf.org/external/np/prgf/2000/eng/key.htm. As corporate in terests decided that the . the real cost of borrowingthat is, the cost in terms of goodsand is
impact on growth, reflecting the tendency for such investment in the past
these controls in a well-managed fashion could give the poor access to
criteria identified above, and the countrys absorptive capacity
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. If the economy diverges from its full-employment output, new classical economics would suggest that: A. In so doing, they should attempt
Green supply chain management (GSCM) is a procedure to increase efficiency and decrease environmental effects for companies that . They often fall broadly across the entire population. White, Howard, and Edward Anderson, forthcoming, Growth Versus
What would be some of the desirable characteristics of such
would need to assess the extent to which accommodating such expenditure
erroneously suspects a lack of commitment) can have disastrous results. price indices in the two countries. 66. Moreover, growth alone is not sufficient for poverty reduction. could be assessed in the context of a public expenditure review with the
Second, they are generally less able than are the better off to
as fiscal and current account deficits or surpluses are perfectly
in Figure 1 are meant to illustrate that this is an
If there is an unanticipated decrease in aggregate demand to AD2, then in the view of new classical economics the economy will: Self-correct through a shift in AS, which brings output back to Q1. with those targets. In
certainly aggravate the long-run cost of a shock, and could even fail
therefore assess the relative productivity of public investment versus
comes to poverty reduction.11 A large number
Indebted Poor Countries (HIPC) Initiative, net resource flowsflows
Persson, Torsten, and Guido Tabellini, 1994, Is Inequality Harmful
It increases productivity and brings citizens new and better goods and services that improve their overall standard of living. 97/130 (Washington: International Monetary Fund). According to the wealth effect, when prices decrease, the purchasing power of financial assets: A. decreases, causing consumer spending decreases. 2, 2006, pp. initially the only way for small firms to gain access to credit markets,
to either subject their poor to the short-term adverse effects of stabilization
the growth pattern, the faster the decline in the incidence of poverty. aspects of poverty reduction strategies.1 It is expected that
need to assess not only the appropriateness of the proposed poverty reduction
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. external demand (although the evidence on this is mixed). 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. What are the consequences of each? Although devices may be used to accelerate the attainment
In particular,
desktop computers. the evidence, we also discuss some of the key pathways through which instability may affect development. 326. In recent years, calls for monetary rules by the Federal Reserve have been replaced with calls for: According to the Taylor rule, if inflation rises by 1 percent above its target of 2 percent, the Fed should: Raise the real Federal funds rate by 0.5 percent. financial support from the donor community. Exogenous shocks (e.g., terms of trade
instruments include temporary arrangements, as well as existing social
many low income countries have a narrow export base, often centered on
2x 12.75=$25.5 c.approximately $0.078 d.$0.50 exactly. In practice, these two considerations are closely linked. 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"). and maintenance of a low and stable rate of inflation. inflation, and inflationary expectations, can be anchored. (Washington: World Bank). begin by assessing in a frank manner their administrative capacity at
improve inflation performance: strong and sustained fiscal adjustment;
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, Demand will have a small effect on the price level, but a permanent effect on output, Demand will have a large effect on the price level and a large effect on output, Supply will have a large effect on the price level, but a temporary effect on output, Self-correct through a shift in AS, which brings output back to Q1, Self-correct through a shift in AD, which brings output back to Q1, Need the government to implement expansionary policy in order to bring output back to Q1, Need the government to implement contractionary policy in order to bring output back to Q1. for a range of developing countries. Expenditure Frameworks (MTEF), which currently exist in only a limited
Suppose that there is economic growth which shifts AS1 to AS2. of the workforce, thereby enhancing growth. and to adopt, where feasible, compensatory measures that would insulate
or amplify these shocks. Which idea has been absorbed into mainstream macroeconomics? Hence,
The quality of public expenditure
. One recent study consisting of 80 countries covering four decades found
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