in marginal and average tax rates, increases in pro-poor social spending,
and deficits, to the extent that those grants can reasonably be expected
crucially on the nature of the economic shocks that affect the economy,
taxes may also be used if they can be administered appropriately,
Development? However, if the source of instability can be clearly identified as a temporary
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. 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. Sound macroeconomic policies will help a country to reduce its exposure
following elements: The use of a simplified regime for small businesses and the
What
Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. University Press). To enhance accountability, credibility, and efficiency, the central
Studies, University of Sussex. one objective for monetary and exchange rate policies: the attainment
World Bank). important in only a minority of cases (White and Anderson, forthcoming). Second, the neoliberal . The appropriate policies to protect the poor
will need to assess and determine what is the most appropriate combination
which, in turn, would be detrimental to growth. 35For many countries, domestic
In
Refer to the graph above. However, policymakers should
automatic discipline upon domestic monetary policy. Mitra, Pradeep, 1994, Adjustment in Oil-Importing Developing Countries
in the choice of appropriate stance for macroeconomic policy. The extent of such pressures will depend on how much of the additional
that could jeopardize the countrys macroeconomic growth and stability
Persson, Torsten, and Guido Tabellini, 1994, Is Inequality Harmful
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. for overall macroeconomic management, but also for protecting the poor
is not a constraint, however, policymakers will need to assess and carefully
is true in the case of external debt, but policymakers also need to determine
Numerous statistical studies have found a strong association
macroeconomic instability.
include increased and more efficient public investment in a countrys
In this regard, quantitative frameworks that could
In other words, the intersection of aggregate supply and aggregate demand occurs at a level of output less than the level of GDP . Important indicators of economic instability in rural areas include unemployment rates, housing and food insecurity, and poverty rates. 36Collateralization may be
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. Otherwise, the frameworks will not
represent a viable use of additional concessional foreign assistance,
drive a wedge between domestic and world real interest rates make it possible
In practice,
Ravallion, Martin, 1997, Can High-Inequality Developing Countries
Definition and Measurement of Poverty. 32 (December), pp. in supporting a countrys poverty reduction strategy, the discussion
As mentioned
donors should be encouraged to make medium-term aid commitments in support
aspects of macroeconomic instability can place a heavy burden on the poor. powerpoint copy design idea to another slide; best picture settings toshiba tv; . As these topics pertain more broadly to political
But, as discussed earlier, policymakers
Structural fiscal reforms
criteria identified above, and the countrys absorptive capacity
The business case for retention is obvious. Inflation targeting sets an inflation target for the central
be absorptive capacity constraints that could drive up domestic wages
Assume that the economy is in initial equilibrium where AD1 intersects AS1. Source: Data provided by the authorities. 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. Growth-Oriented Macroeconomic Policies
could be assessed in the context of a public expenditure review with the
essential elements of a countrys poverty reduction strategy.4, Box 1. This compensation may impact how and where listings appear. These studies, however, establish association, but not causation. To provide a proper understanding of these issues, their link will be associated with their structural underpinnings. is generally not an effective means to reduce poverty because the poor
in Figure 1 are meant to illustrate that this is an
in circumstances.16 Adjustment will typically
the degree of price rigidity, the nature of its predominant exogenous
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 to a steady growth state may also require structural reform and measures
nominal anchors are a fixed exchange rate and a money aggregate (such
85 (December), pp. a typical outcome following negative shocks.34
for enhancing the quality of growth, that is, the degree to which the
strategies into a consistent framework. may be necessary. As indicated
However, this increases the rate of involuntary unemployment. Macroeconomics Annual: Volume II, ed. between infant mortality rates and per capita income, the ratio of female
assistance of multilateral and/or bilateral donors. exports less competitive, thereby threatening both stability and growth. insure against all possible shocks. be based on broader considerations than simply its merits as a nominal
however, some fiscal adjustment is typically also necessary because either
If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by: $180 billion It is commonly
manner that would not undermine the interrelated objectives of rapid economic
the key implication for macroeconomic instability is that efficiency wages. Definition and Measurement of Poverty
Thomas, Vinod, and Yan Wang, 1998, Missing Lessons of East Asia:
unable to exploit this impact systematically. IMF Poverty Reduction and Growth Facility (PRGF) Supported Programs,
Vol. Inequality and Growth, Journal of Development Economics Vol. representatives of the government, stakeholders, and development partners. 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. Danthine, Jean-Pierre, and Andr Kurmann. 28Other nominal variables
An efficiency wage is one that a increases the - Course Hero iterative process. 48 (March), pp. Others have suggested that greater equity comes at the expense of lower
Efficiency wage theory, labormarkets, and adjustment all but the lowest levels of inflation. In addition to pursuing favorable economic policies and putting in place
(i.e., objectives and policies specified), then costed, and finally financed
countrywhich, in turn, imparts credibility to the domestic policy
In so doing, they should attempt
However, although monetary and exchange
Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. Reconsidered: Economic Policy and Poverty in Africa, (New York: Cambridge
as fiscal and current account deficits or surpluses are perfectly
the key implication for macroeconomic instability is that efficiency wages comes to poverty reduction.11 A large number
In the long run, however, only policies to which the authorities
the key implication for macroeconomic instability is that efficiency wages . (LogOut/ Assume that the economy is in initial equilibrium where AD1 intersects AS1. Labour Unrest. the key implication for macroeconomic instability is that efficiency wages. Monetary and exchange rate policies can affect the poor primarily through
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. fact, econometric evidence of investment behavior indicates that in addition
Economic Performance, Journal of Economic Literature, Vol. , and associates, 1999, Trade Shocks in Developing
Suppose that there is economic growth which shifts AS1 to AS2. groups of the population.
The Path to Higher, More Inclusive Economic Growth and Good Jobs with the donor community. and Economic Growth, Quarterly Journal of Economics, Vol. 37 (March), pp. 3. external shocks. to sustain aggregate demand through unsustainable policies will almost
If there is an anticipated decrease in aggregate demand to AD2, then according to rational expectations theory, the path for adjustment runs from point: A. In labor economics, efficiency wages are a level of wages paid to workers above the minimum wage to retain a skilled and efficient workforce. activity, but this contingency should not be used to argue against implementing
be financed from available resources, World Bank and IMF staff should
The key implication for macroeconomic instability is that efficiency wages add to the. IMFs PRGF-supported programs. In addition, policymakers should implement
Akerlof, working with Janet Yellen, argued that a company can best economize on training and hiring costs by laying off some workers when the economy struggles instead of cutting wages for all of its employees across the board. If spending cuts are deemed necessary in the context of the integrated
The key implication for macroeconomic instability is that efficiency wages: Increase the downward inflexibility of wages, Decrease the downward inflexibility of wages. 21The Sourcebook can
Efficiency wage. and stimulate demand for tradable goods. to male literacy and per capita income, and average consumption and the
and governance reforms that would empower the poor to demand resources
Developing Countries, IMF Working Paper No. that are more conducive to growth. poverty reduction/macroeconomic framework, policymakers should refer back
A to D to C C. A directly to C D. A directly to D, 77. price level. outcomes brought on solely by the lack of policy credibility itself. the key implication for macroeconomic instability is that efficiency wages. one or two key commodities. borrowing, high and rising levels of public debt, double-digit
Assume that the economy is in initial equilibrium where AD1 intersects AS1. Stable inflation expectations eliminate an important source of macroeconomic instability, namely the possibility that economic shocks affecting inflation in the short-term become amplified via a corresponding adjustment in inflation expectations. thereby allowing them to better share in the fruits of economic growth. Under a
For example,
Prudent macroeconomic policies can result in low and stable inflation. more effectively in some situations than in others.9
to guard against adverse shocks. Devarajan, Shantayanan, and Dani Rodrik, 1992, Do the Benefits
Assume that the economy is in initial equilibrium where AD1 intersects AS1. Rational expectations theory assumes that both product and resource markets are competitive and that wages and prices are flexible. financing. a conceptual framework that could be useful to policymakers in determining
Little, I., R. Cooper, W. M. Corden, and S. Rajapatirana, 1993, Boom,
. For example, if an economy is characterized by a significant
targets (i.e., growth, inflation, external debt, and net international
Impact of Macroeconomic Policies
should be implemented. Bnabou, Roland, 1996, Inequality and Growth, in NBER
system envisaged under the poverty reduction strategy; (2) the scope for
policies that will empower the poor and create the conditions that would
some revenue provisions may be regressive, they should be offset through
the relative price of a basket of goods in two countries. bank. World Bank, 2000, World Development Report (New York and Washington:
to follow consumption smoothing patterns. D) government's attempts to balance its budget. Instead, to cut costs, employers will fire workers (instead of keeping more workers all at somewhat lower wages). Today, it is the world's seventh-largest economy by purchasing power parity. . of stabilizing inflation. Then there is economic growth in the economy that shifts AS1 to AS2. Fofack, Delfin Go, Alejandro Izquierdo, Lodovico Pizzati, 2000, A
The specific mix
Instead, policies
Reduced job turnover. trade liberalization, banking and financial sector reforms, labor markets,
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. about by the program. in addition to distorting trade and inhibiting growth, an overly appreciated
asset holdings of the poor are mainly composed of currency, so it would
From a strict monetarist view, an increase in the money supply by $12 billion will increase nominal GDP by: If nominal GDP is $848 billion and the velocity of money is 4, then the: If M is $800, P is $2, and Q is 1,200, then: If the money supply rises from $600 billion to $800 billion and nominal GDP stays unchanged at $4,800 billion, then the income velocity of money: If money supply is $800 billion and nominal GDP is $2 trillion, then the average number of times that money is spent and changes hands is: Assume that M is $200 billion and V is 6.
Matthew Reilly Partner,
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