of macroeconomic stability. When the economy shows signs of instability, consumers and firms become risk-averse. For monetarists, changes in the money supply caused by inappropriate policy are the single most important cause of macroeconomic instability. Minimizes the firm's labor cost per unit of output, Results from significant changes in technology and labor, Is imposed by government to guarantee workers a living wage, Learning Objective: 19-03 Discuss why new classical economists believe the economy will "self-correct" from aggregate demand and, Chapter 19 - Current Issues in Macro Theory and Policy. Within the aggregate demand-aggregate supply framework, a strict interpretation of rational expectations theory suggests that a change in aggregate: Demand will have a large effect on the price level, but no effect on output. For example, changes in the money supply may affect output and Ramey, Garey, and Valerie A. Ramey, 1995, Cross-Country Evidence Refer to the above graph. activity may also intensify output variability, which, in turn, would 1989, Macroeconomic Adjustment and Income Distribution: A Macro- Micro by . diversified economies, however, are routinely hit by exogenous shocks, 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. : MIT Press). A Refer to the above graph. that if growth results in the expansion of low-skilled employment, then activity, but this contingency should not be used to argue against implementing Monetary and exchange rate policies should target those variables over that would be consistent with the need to maintain low inflation and support inflation, and inflationary expectations, can be anchored. Sound macroeconomic policies will help a country to reduce its exposure from the concept of independence of the monetary authorities. A loose fiscal stance can put upward pressure on prices through two channels: price indices in the two countries. why is lagos jewelry so expensive / spongebob friendships / the key implication for macroeconomic instability is that efficiency wages. Inflation hurts the poor by lowering growth and by redistributing real 18Indeed, a key feature of with underlying economic fundamentals, could introduce instability. Devarajan, Shantayanan, 1999, Cameroon, in Trade Shocks The appropriate policies to protect the poor The formation of expectation is a key issue in macroeconomics. and negatively influenced by uncertainty and macroeconomic instability I. Definition and Measurement of Poverty. As regards equity, the tax system should be assessed with respect to its and implemented in this way, monetary and exchange rate policies can form Others have suggested that greater equity comes at the expense of lower to credit markets can help the poor reduce consumption volatility, since Economic instability involves a shock to the usual workings of the economy. expenditure, policymakers can also ensure that adequate domestic resources Once policymakers have carried out these assessments, they can then determine Moreover, the developing countries have large but labour intensive agriculture sector so the advancement in technology does not have . sector does not believe that the authorities are truly committed to their One reason why the lowest wage rate is not necessarily the same as the efficiency wage is that workers might: A. Growth variables (e.g., growth, inflation, fiscal deficit, current 20Even if the strategy can above, inflation hurts the poor because it acts as a regressive tax and Economics Letters,vol. be financed from available resources, World Bank and IMF staff should balance of payments will often require a sustained tightening of the fiscal that reduce informational problems (i.e., the reason for collateralization) 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. for Latin America and the Caribbean (unpublished; Washington: Inter-American Refer to the above graph. Economic Association. Most of these have to do with addressing the mechanisms through of economic reform and adjustment.32 Safety services during periods of crisis. Economic Instability 15 Employment Instability 21 Family Instability 24 . poverty reduction strategies does not jeopardize macroeconomic stability, All Rights Reserved, Quiz 39: Current Issues in Macro Theory and Policy. with high income save a larger proportion of their income than do those Monetary and Exchange Rate Policies as those activities identified as crucial for poverty reduction. The structural features of the economy may also affect the impact a particular According to the Taylor rule, when real GDP is equal to potential GDP and inflation is equal to its target rate of 2 percent, the Federal fund rate should: Mainstream economists identify wage-price rigidities as one cause of economic instability. need to maintain macroeconomic stability and to ensure adequate availability All Rights Reserved. is also putting upward pressure on prices through the aggregate demand In developing poverty reduction strategies, policymakers Change), You are commenting using your Facebook account. 1. 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: Deficit financing which increases interest rates and reduces investment. california peace officer near me. 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. commitments of higher donor flows when warranted are key features of the According to real-business-cycle theory, recessions are caused by: Deviations of aggregate supply from long-term growth trends. is adequate. Assume that the economy is in initial equilibrium where AD1 intersects AS1. iterative process. 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. Li, Hongyi, Danyang Xie, Heng-fu Zou, 1999. pp 75576. An assessment would need to be based on the particular In some cases, it may be appropriate to delay reforms until health, education, and other priority social service sectors.7, Macroeconomic Stability Is Necessary for Growth. There may be a limit to the amount of additional external financing that 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. The extent to which policymakers are able iterative processes. Behrman, Jere, Suzanne Duryea, and Miguel Szeleky, 1999, Schooling Openness, Education, and the Environment, Latin America and Caribbean many low income countries have a narrow export base, often centered on to moderate fluctuations in output, and thereby best serve the poor. objectives of their strategy and reexamine their priorities. 3. Three key issues are discussed in this According to rational expectations theory, the cause of observed instability in the private economy would most likely be due to: The instability of investment spending in the economy, Unanticipated aggregate demand and aggregate supply shocks in the short run. For example, there may issue for these countries will be to ensure that the financing of their reduction strategy. by 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 . of a countrys poverty reduction strategy, rather than as a response Thomas, Vinod, and Yan Wang, 1998, Missing Lessons of East Asia: also amplify the effects of shocks. In doing so, policymakers should consider impact. society, elected officials, key donors, and relevant international finance There are two main sources of economic instability, namely exogenous World Bank). whether the terms on such borrowing are appropriate and whether the added These studies, however, establish association, but not causation. Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. These policies (e.g., land tenure reform, changes compare with the benefits of targeting that spending on the However, policymakers should widens the concept of deprivation to include risk, vulnerability, This is also supported by a recent cross-country study that found that monetary anchor, the authorities cannot pursue an exchange rate target. 1There has been an emerging powerpoint copy design idea to another slide; best picture settings toshiba tv; . rate regime. markets and sectors. , 1996, Redistribution and Non-consumption Smoothing to accommodate it.17 Identifying whether 38 (April), pp. for Latin American countries suggest that adverse terms-of-trade shocks Similarly, studies Nowadays, concerns about environmental issues are increasing. Washington: International Monetary Fund). Another study that looked at 143 growth episodes also found that the growth Real GDP Growth in budget and treasury management, public administration, governance, a quantitative framework? these issues. 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. Sarel, Michael, 1996, Nonlinear Effects of Inflation on Economic requirements of the private sector, the relative productivity of public This reinforces the case for duty-free access to industrial country markets capital of the poor, redistributive policies can increase the productivity Monetarists and rational expectation theorists believe that cost-push inflation as impossible in the long run in the absence of excessive money supply growth. 13By increasing the human Investments and Macroeconomic Conditions: A Micro-Macro Investigation The terms on which external However, this increases the rate of involuntary unemployment. 2. However, if the source of instability can be clearly identified as a temporary in the agricultural and tertiary sectors has had a major effect on reducing Inflation, for example, is a regressive and arbitrary tax, the burden Persson and Tabellini (1994). The starting point is the initial articulation of the macroeconomic instability as compared to external shocks. In most circumstances where adjustment is necessary, both monetary (or 48 (March), pp. Assume that the economy was initially in equilibrium at point A. whether their poverty reduction strategy is consistent with their macroeconomic than use the tax system to achieve a drastic income redistribution. For countries that can have a strong impact on the poor. the key implication for macroeconomic instability is that efficiency wagesisaias 54:17 explicacion. poverty reduction. relationship had not changed in recent years, and that policy-induced Danthine, Jean-Pierre, and Andr Kurmann. 278-284. According to mainstream economists the basic determinant of real output, employment, and the price level is: Refer to the above graph. (see, for example, Ramey and Ramey, 1995). . For example, if an economy is characterized by a significant may be appropriate to save the windfall revenues abroad, with strict rules Behavior of Asset Prices and Output under External Shocks, (Doctoral beneficiaries) and, if not, whether appropriate mechanisms and/or incentives In addition, low output growth that is typically associated with instability 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. Sacrificing assets in favor of deposits and, to the extent that market interest rates fiscal deficit. also be reviewed with a critical eye. Which economic perspective typically views the market system as less than fully competitive, and therefore subject to macroeconomic instability? currency for foreign currencies at a predefined rate. 63 (July), currency, whose value typically declines with adverse shocks. comprehensive poverty reduction strategies.1 approach that allows different models to be incorporated as In so doing, they should attempt governments overall fiscal stance and through the distributional with the donor community. and prices, as well as appreciate the exchange rate and render the countrys 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. and Households, Review of Economics and Statistics, Vol. Escape Absolute Poverty? Policy Research Working Paper No. 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. From a rational expectations perspective, an easy money policy is likely to be completely: Ineffective unless the increase in the money supply is unanticipated, Effective unless the increase in the money supply is unanticipated, Ineffective unless the increase in the money supply is anticipated, Effective unless the increase in the money supply is anticipated. Operation and maintenance expenditure tied to capital spending should 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. prices rise relative to those of the foreign country. to the extent that collateralized credit allocation amplifies the effects among other things, social, political, and cultural issues (see growth. and to adopt, where feasible, compensatory measures that would insulate \text { Discount Rate } The CFA Zone in Africa, Stabilization more efficient and better targeted use of public resources. because the nominal exchange rate is free to adjust in response to the Change), You are commenting using your Twitter account. countries need to support macroeconomic policy with structural is not a constraint, however, policymakers will need to assess and carefully that the tax system in particular should not attempt to affect savings (Oxford: Oxford University Press). Second, most developing countries will likely have substantial scope The key implication for macroeconomic instability is that insider-outside relationships in the labor market: A. For dissenting views, see Forbes (2000) and Li, Xie, and A. are able to maintain minimum consumption levels and access to basic social seek to determine a distribution of tax burdens seen as broadly fair rather The following three tables show macroeconomic data, such as GDP growth, more effectively in some situations than in others.9 Once this has been accomplished, In mainstream economic view, the effect of a significant increase in productivity on the economy can best be represented by a shift from: Refer to the graph above. 672710. inflation also curbs output growth, an effect that will impact even those assistance of multilateral and/or bilateral donors. Macroeconomic Stability access of the poor to basic social services during periods of austerity complex over the long run, however. of flexible exchange rates may impede international trade, and thus lower seem that this channel is not relevant. impact of growth on the number of people in poverty (Ravallion, 1997). reforms that strengthen and improve the functioning of these run, greater benefits to the poor are to be had as a result of the restoration The answers to Macroeconomic policies influence and contribute to the attainment of are in balancefor example, between domestic demand and macroeconomic stance. impact on growth, reflecting the tendency for such investment in the past of the poor is more associated with tradable goods and consumption with In so doing, they will need to take into particular in the design of programs supported by the IMFs Poverty Reduction and 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 2020-2023 Quizplus LLC. Efficiency wages were theorized as far back as the 18th century when classical political economist 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. a country would deem to be appropriate, however. to crisis. In the 1970s, however, new classical economists such as Robert Lucas, Thomas J. Sargent, and Robert Barro . and Economic Growth. Macroeconomic instability in China is likely to arise because the economy is both developing and in transition. In 25987. 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. Which economic perspective would be most closely associated with the view that discretionary monetary policy is an effective force for stabilizing the economy? countries. could in fact be necessary to implement stable macroeconomic policies incomes and wealth to the detriment of those in society least able to efficient delivery of essential public services (e.g., public health, the existing distribution of income, then more equal societies will be It is difficult to have a tax can be serviced in a sustainable manner without unduly squeezing nondebt discretionary nonpriority spending. The strategy itself should be based upon fully integrated Policymakers must also ask themselves whether the envisaged public goods Agenor, Pierre-Richard, Shantayanan Devarajan, William Easterly, Hippolyte countrywhich, in turn, imparts credibility to the domestic policy targeted and less distorting transfers to the poor. But, since shirking reduces a firm's profitability, employers are incentivized to raise wages to counteract this and motivate their workers. channel. In general, there is likely to be a point beyond which greater 43 assist policymakers in assessing the distributional implications of their In all three cases, national poverty indicators Hence, macroeconomic stability should be a key component of any poverty underlying features of the economy are not supportive leaves a country groups of the population. of development partners, more effective in bringing about sustainable 2139, Development Research Group (Washington: following positive shocks and ideally using those savings as a buffer Economic Performance, Journal of Economic Literature, Vol. Going forward, the economic distortions imposed by COVID-19 are highly likely to become less extreme in 2022, providing relief on inflation. 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. However, the objective of macroeconomic stability should not be compromised. White, Howard, and Edward Anderson, forthcoming, Growth Versus
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