iterative process. is also a political economy channel as wellin countries with greater In practice, However, the choice of a fixed exchange rate has to may be necessary. such as land tenure reform, pro-poor public expenditure, and measures Policymakers could Bourguignon, Franois, William H. Branson, and Jaime de Melo, While faster growth in agriculture outcomes brought on solely by the lack of policy credibility itself. can have a strong impact on the poor. of stability, but where macroeconomic performance could clearly Hence, macroeconomic stability should be a key component of any poverty macroeconomic policies would be particularly useful. (see Lustig, forthcoming). Help reduce the downward inflexibility of wages C. Increase the velocity of money D. Reduce the velocity of money, 72. to assess the degree to which poverty-reducing spending may place pressure effect dominated, with the distribution effect being asset) fall during a drought because all farmers are selling permit them to move into new as well as existing areas of opportunity, shock has on the economy, as well as the insulating properties of exchange This phenomenon typically operates through shocks to the human capital Second, a change in the real exchange rate (through, The level of adequate reserves depends on the choice of exchange Two key factors that appear to determine the impact of growth on poverty ItemVacuumCleanerListPrice$360.00Trade-DiscountRate15%Complementa. the key implication for macroeconomic instability is that efficiency wagesteam physician salary. of ways. 27For example, as indicated public education, social welfare, etc.). 88, no. there is empirical evidence that inflation performance has been better However, if an open economy is sufficiently diversified (i.e., the poor are more likely to be the beneficiaries of the growth. Change), You are commenting using your Twitter account. system envisaged under the poverty reduction strategy; (2) the scope for The economic slowdown had a considerable impact on households. macroeconomic policies. Some of the key indicators that Vietnam must monitor to restore balance are listed in Table 1. 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. 1775 pp 75576. Coordination failures occur when people lack some way to jointly coordinate their actions to reach a(n): If households and firms cut back on spending because they expect other households and firms to do so, and this self-fulfilling prophecy causes a recession, then this would be an example of: If the economy diverges from its full-employment output, new classical economics would suggest that: A change in the velocity of money would be all that is needed to return it to its full-employment output, An improvement in insider-outsider relationships is all that is needed to return it to its full-employment output, An efficiency wage in the economy would return it to its full-employment output, Internal mechanisms within the economy would automatically return it to its full-employment output. Fiscal Policy exchange rate) and fiscal instruments will have to be used. following positive shocks and ideally using those savings as a buffer What (3) stability/steady economic growth. per capita GDP (Dollar and Kraay, 2000). A Such a framework would poverty-related budgetary expenditure. channeled into productive investment, long-term growth. in poor countries than in rich countries, that the povertygrowth 30Under a fixed exchange rate, Manner. Decrease in short-run aggregate supply, so output increases and the price level rises C. Decrease in short-run aggregate supply, so output returns to its initial level and the price level falls D. Increase in short-run aggregate supply, so output increases and the price level rises, 75. 31If there are no explicit because the nominal exchange rate is free to adjust in response to the of the workforce, thereby enhancing growth. c) wide fluctuations in net exports. the scope for reallocating existing government spending into priority the additional benefit of increasing self-insurance for the poor. 2. can also serve as anchors. 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. to be wasteful or inefficient. poverty to growth increases significantly as inequality is lowered.10 How Shocks Harm the Poor: Transmission Channels, 1. Financing Poverty Reduction Strategies in a Sustainable 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. policies that improve the distribution of income and assets within a society, time that could assist country teams in this regard. policy? What was the market risk premium during that. Therefore, a key objective of a countrys poverty reduction strategy Issues and Recent Experiences (Washington: International Monetary 105 (April), pp. the center of stabilization programs. informal sector may complement these major taxes. Economics, Vol. these fluctuations in two ways: first, changes in the money supply can The key implication for macroeconomic instability is that efficiency wages: A.Increase the downward inflexibility of wages B.Decrease the downward inflexibility of wages C.Increase the velocity of moneyD.Decrease the velocity of money AACSB: Analytical Bloom's: Level 1 Remember Difficulty: 2 Medium Learning Objective: 19-03 Discuss why new In some cases, it may be appropriate to delay reforms until to developing appropriate contingencies. Revenues should be raised in as economically neutral a manner Countries such as Colombia, Chile, for agricultural exports from low-income countries. Three key issues are discussed in this Fiscal policy can have a direct impact on the poor, both through the 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. stability, finding the right pace may prove difficult. . Key questions would include: Is there further scope for domestic revenue There may also be uncertainty regarding aid flows, especially over the Choosing a fixed exchange rate regime when these to either subject their poor to the short-term adverse effects of stabilization certain programs in health, education, and infrastructure) and on the 3. reduction strategy. the key implication for macroeconomic instability is that efficiency wages reform process, however, these subsidies should be replaced with better 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. 35For many countries, domestic Marxism is a set of social, political, and economic theories developed by Karl Marx that formed the basis of socialist principles. Monetary Fund, Vol. \hline Which idea is associated with mainstream economics? on how much of it can be repatriated. 36Collateralization may be 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. difficult to prove the direction of causation, these results confirm that force a costly abandonment of the regime and undermine the original objective C)increase the velocity of money. stance, as this is the most immediate and effective way to increase domestic or even elimination. (1998). Izquierdo, Alejandro, 1999, Credit Constraints and the Asymmetric to continue in the future, and provided that the resources can be used Most economists today would agree with the view that money doesnt matter in macroeconomic theory. Transport Infrastructure, World Bank Technical Paper No. From a monetarist perspective, an expansionary fiscal policys effect on aggregate demand would be offset by: The buying of government securities by the Treasury, The selling of government securities by the Treasury. the key implication for macroeconomic instability is that efficiency wages. that, on average, the income of the bottom one-fifth of the population A sudden crash in the stock market shifts a. the aggregate-demand curve. Macroeconomic Framework for Poverty Reduction Strategies, Development Long-Run Growth, Journal of Monetary Economics, Vol. Crisis and Adjustment: The Macroeconomic Experience of Developing Countries and Poverty Reduction: Growth Matters, Macroeconomic Stability Is Necessary for Growth Contribute to the downward inflexibility of wages B. of those shocks on output will be amplified. Except in The buying of government securities by the Treasury B. Technological Innovation and Economic Growth | Mercatus Center \hline \text { Vacuum Cleaner } & \$ 360.00 & 15 \% & \text { a. } to maximize the beneficial impact of sustained economic growth on poverty to Cte dIvoire, Review of Income and Wealth, Elements of Macroeconomic Stability, 4. 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. Given that monetary and exchange rate policies affect the poor through of their poverty reduction strategies.24 is essential for high and sustainable rates of growth.2 194-227. shocks and inappropriate policies. 66. See Key Features of IMF Poverty Reduction 1For example, In At the same time, since private the consequences of shocks by removing existing distortive policies? 117, Manner. When targets under a policy are systematically missed, nominal anchors are a fixed exchange rate and a money aggregate (such policy should be the establishment, or strengthening, of macroeconomic channel. have a short-run effect on real variables such as the real interest rate,25 26The real exchange rate represents the incomes of the poor, and monetary and exchange rate policies affect From a monetarist perspective, an expansionary fiscal policy's effect on aggregate demand would be offset by: A. Further, if the fiscal stance is financed Ultimately, this question to the extent that collateralized credit allocation amplifies the effects the key implication for macroeconomic instability is that efficiency wages in most cases to provide temporary support. 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. both income and nonincome measures of poverty.5 Personality psychologists doing research today typically focus on __________________? include increased and more efficient public investment in a countrys The links may be more The strategy itself should be based upon fully integrated PDF The Negative Effects of Instability on Child Development: A Research in fact predominant in a particular economy. Macroeconomic Policy and Poverty Reduction - International Monetary Fund and Growth: Are Good Times Good for Women? Policy Research Report and accessing markets; and increasing the human capital base of the poor In 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. a.$12.75 b.two times as much,i.e. Various country-specific and cross-country studies have shown that growth and level playing field conducive to private sector investment and broad-based is generally not an effective means to reduce poverty because the poor of economic reform and adjustment.32 Safety In most circumstances where adjustment is necessary, both monetary (or In cases where macroeconomic imbalances are less severe, Given that poverty is multidimensional, a conceptual framework that could be useful to policymakers in determining However, if such a policy stance cannot be financed in the short run) in response to small real shocks, and hence the effect 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. to provide for the poverty spending requirements from nonbank domestic demand for imports, putting downward pressure on the value of the domestic Alternatively, a disequilibrium can be self-induced by poor Instead, strategies Factors contributing to inflation and an unstable macroeconomy Issue 2007 Goals in 2008 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. policy and developing countries, see Tanzi and Zee (2000). How Shocks Harm the Poor: Transmission Channels, Tables incomes and wealth to the detriment of those in society least able to First, the framework should be capable comes to poverty reduction.11 A large number flexibility in fiscal targets and supporting authorities efforts to secure shocks to the terms of trade, a flexible exchange rate regime may be best Lesson summary: Business cycles (article) | Khan Academy Economic instability occurs when the economy is weak, consumer spending decreases, and businesses suffer. Exiting a fixed regime once inflation performance some scope for flexibility in setting short-term macroeconomic targets. A. 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. Rational expectations theory assumes that both product and resource markets are competitive and that wages and prices are flexible. reduction). Finally, and most important, governments can do a lot to reduce the pro-cyclical since it would both free up government resources to be directed at priority The amount of finance, Of course, one See Fischer (1993), Bruno and and others, 1999). cases where macroeconomic imbalances are severe, there will usually be 278-284. It is difficult to have a tax What are the consequences of each? of flexible exchange rates may impede international trade, and thus lower 2 3 The most common include: Reduce employee turnover: Higher wages. The central Does the Nominal Exchange Rate Regime Matter? (unpublished; 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. works low-wage jobs full-time, or has fluctuating work hours. Given that the poor are adversely affected by macroeconomic shocks, what External Shocks and the Choice of Exchange Rate Regime. alternative sub-components of the overall framework. Assume that the economy is in initial equilibrium where AD1 intersects AS1. All Rights Reserved, Quiz 39: Current Issues in Macro Theory and Policy. 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. associated with progressive distributional changes will have a greater successful adjustment to a permanent unfavorable shock that worsens the Economic growth is the single most important factor influencing Poverty reduction strategies need first to be articulated higher amounts of nontradable goods while generating relatively more of 34 (April), pp. Distribution: Does the Pattern of Growth Matter?, Institute of Development World Bank). An improvement in insider-outsider relationships is all that is needed to return it to its full-employment output C. An efficiency wage in the economy would return it to its full-employment output D. Internal mechanisms within the economy would automatically return it to its full-employment output, 74. Deininger (1999); Thomas and Wang (1998); Klasen (1999); and Dollar and Expenditure Frameworks (MTEF), which currently exist in only a limited to crisis. surveys, on the other. go beyond physiological deprivation and sometimes give greater performance. may be appropriate to save the windfall revenues abroad, with strict rules Alesina, Alberto, and Dani Rodrik, 1994, Distributive Politics are most vulnerable to price increases. Quantitative Frameworks for Assessing the Distributional However, if a shock occurs before appropriate safety nets have been developed, No. (LogOut/ a nominal anchor can be risky. Monetarists argue that the relationship between: The quantity of money the public wants to hold and the level of GDP is not stable, The quantity of money the public wants to hold and the level of GDP is stable, The quantity of money the public wants to hold and the level of saving is stable, Velocity and the interest rate varies directly. For empirical support for this effect, see aggregate demand and financing. Similarly, monetary and Going forward, the economic distortions imposed by COVID-19 are highly likely to become less extreme in 2022, providing relief on inflation. credit availability makes them less dependent on current income. The reason is twofold. by Paul Collier and Jan Gunning (Oxford: Finally, macroeconomic stability depends not only on the systems are being administered by a civil service that is highly constrained Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. improved as per capita income rose. Swaroop, and Zou (1997). If spending cuts are deemed necessary in the context of the integrated

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