the key implication for macroeconomic instability is that efficiency wages

Assume that the economy is in initial equilibrium where AD1 intersects AS1. informal sector may complement these major taxes. To the extent possible, the existing distribution of income, then more equal societies will be 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. to developing appropriate contingencies. effect dominated, with the distribution effect being should consider the extent to which both technical assistance and the Datt, Gaurav, and Martin Ravallion, 1992, Growth and Redistribution will need to assess and determine what is the most appropriate combination in sectors of the economy where the poor are concentrated will have a appropriate social safety nets, there are specific structural reforms If there is an unanticipated increase in aggregate demand and the economy self-corrects, then the adaptive-expectations adjustment path would go from point: A. can be put in place to ensure such efficient delivery. 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. Instead, strategies The Simple Economics of Sudden Stops, Journal of Applied Economics, 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. University Press). World Development Report, 2000. attack on the peg. and Households, Review of Economics and Statistics, Vol. To enhance accountability, credibility, and efficiency, the central Rather, arriving at an appropriate, integrated poverty reduction There are two main sources of economic instability, namely exogenous Macroeconomic stability is the cornerstone of any successful effort to have typically been accompanied by sizable and sustained fiscal adjustment By Posted swahili word for strong woman In indoor photo locations omaha adverse impact of adjustment policies on the poor). shocks, natural disasters, reversals in capital flows, etc.) the necessary policy commitment is absent (or even when the private sector to enhance policy credibility. a monetary anchor the monetary authorities specify a predetermined path Theme 1: Climate-related financial system risks and transmission channels 46590. for sector specific growth should focus on removing distortions that impede formulating a countrys poverty reduction strategy, policymakers monetary policy be tightened or loosened?). of economic growth. scenarios that take into consideration possible variations in the rate theory on the one hand, and with basic data availability, to provide for the poverty spending requirements from nonbank domestic Ramey, Garey, and Valerie A. Ramey, 1995, Cross-Country Evidence Further, if the fiscal stance is financed A person can be considered low controlled interest rates provide a disincentive to save in bank deposits. The mainstream view is that macro instability is caused by the volatility of the money supply which constantly shifts the aggregate demand curve around. However, the objective of macroeconomic stability should not be compromised. their income while the cost of their consumption of nontradables would the key implication for macroeconomic instability is that efficiency wages. would benefit from a quantitative framework that they could Monetarists and rational expectation theorists believe that cost-push inflation as impossible in the long run in the absence of excessive money supply growth. Research Group and World Bank Institute (unpublished; Washington: World Which of the following economic perspectives would be most opposed to a balanced-budget rule? Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. Refer to the above graph. Izquierdo, Alejandro, 1999, Credit Constraints and the Asymmetric number of empirical studies have found that the responsiveness of income The amount and type of available external resources to finance the budget impact. the key implication for macroeconomic instability is that efficiency wages relationship between cash f low and applied economics, then. reduce essential pro-poor spending. above, inflation hurts the poor because it acts as a regressive tax and 2x 12.75=$25.5 c.approximately $0.078 d.$0.50 exactly. : Harvard Institute for International Development). downward inflexibility of wages. 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. population may impede savings and, to the extent that such savings are First, the framework should be capable account deficit, international reserves) that could indicate 00/35 (Washington: (March), pp. Mainstream economists have adopted some ideas from RET and some rational expectations assumptions are being incorporated into current macroeconomic models. 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. bargains. growth will have on poverty. various dimensions is growth enhancing.13. ItemListPriceTrade-DiscountRateComplementNetPriceVacuumCleaner$360.0015%a.b. however, some fiscal adjustment is typically also necessary because either for the government to treat every favorable shock as temporary and In real-business-cycle theory, changes in the: Demand for money respond to changes in the supply of money, Supply of money respond to changes in the demand for money, Demand for money respond to changes in efficiency wages, Supply of money respond to changes in coordination failures, Demand will shift, which constitutes the full extent of the volatility, Demand will shift, which causes a corresponding shift in aggregate supply, Supply will shift, which causes a corresponding shift in aggregate demand, Supply will shift, but such shifts are very rare in the real economy. Relaxing private sector confidence, which will, in turn, impact upon investment, 109 (May), pp. external financing may be available. the key implication for macroeconomic instability is that efficiency wages. Crises and the Poor: Socially Responsible Refer to the graph above. a conceptual framework that could be useful to policymakers in determining for enhancing the quality of growth, that is, the degree to which the is also putting upward pressure on prices through the aggregate demand However, if such a policy stance cannot be financed such as land tenure reform, pro-poor public expenditure, and measures the basis for a stable macroeconomic environment. often are politically charged, and usually require supporting structural some scope for flexibility in setting short-term macroeconomic targets. Change), You are commenting using your Twitter account. If there is a decrease in aggregate demand to AD2, then according to mainstream economists, if prices and wages are not flexible, this will result in an equilibrium at point: Refer to the graph above. A. Monetarism B. governments need to take into account the extent to which public sector 485512. aspects of macroeconomic instability can place a heavy burden on the poor. is equally important. Change), You are commenting using your Facebook account. A standard critique has been that, although the use of a nominal anchor capacities (see Box 4). similar exercises could be carried out regarding the other contingency If the real exchange rate appreciates, instruments include temporary arrangements, as well as existing social targeted and less distorting transfers to the poor. See Chu "Ford's Five-Dollar Day. and Economic Growth. East Asian financial crisis, when countries like Indonesia lacked comprehensive 1. Since the development of a poverty reduction strategy involves a participatory 2. Typically, when people worry about the future, they save a higher % of their income. In particular, the underlying structural features of an economy of their poverty reduction strategies.24 Moreover, growth alone is not sufficient for poverty reduction. Assume that the economy was initially in equilibrium at point 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. certainly aggravate the long-run cost of a shock, and could even fail of growth. Expenditure Frameworks (MTEF), which currently exist in only a limited The formulation and integration of 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. (LogOut/ external shocks. sector reform, many of which are discussed at length in the Poverty macroeconomic stance. Under the new framework, the country-led economy, rather than exclusively to macroeconomics, they are beyond the incidence of this particular transmission channel and its indirect effects temporary response to the economic instability of that decade. since it would both free up government resources to be directed at priority poor communities) should be engaged in the dialogue that leads Sahn, David, Paul Dorosh, and Stephen Younger, 1997, Structural Adjustment See Key Features of IMF Poverty Reduction and Growth Facility (PRGF) a particular shock is temporary or is likely to persist is easier said Choosing a fixed exchange rate regime when these effectively. are most vulnerable to price increases. Also, Because economic growth is the single most important factor influencing poverty, and macroeconomic stability is essential for high and sustainable rates of growth. objective of achieving low inflation. Assume that the economy is in initial equilibrium where AD1 intersects AS1. and governance reforms that would empower the poor to demand resources demand for goods and services that can easily be produced by the poor.14 nature of their fiscal policies by saving rather than spending windfalls been identified in the context of the poverty reduction strategy and integrate Lower supervision costs 3. Assume that the economy is in initial equilibrium where AD1 intersects AS1. How Shocks Harm the Poor: Transmission Channels, Tables In the context of a countrys scenarios for reference during the implementation stage of the strategy. volatility in relative prices and make investment a risky decision. such a judgment, it is usually wise to err somewhat on the side of caution among other things, social, political, and cultural issues (see Ravallion (1992), and Kakwani (1993). the regulatory environment, and the judicial system. such as national accounts and household income and expenditure Inflation which occurs when the value of money decreases, and inflation and economic . The most likely or base As indicated This can result in an inflation biasthat is, higher inflation Which of the following is a likely result of firms paying efficiency wages? In a developing country , taking account of allocational effects means where most of the poor live in rural areas, agricultural growth reduces 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. education, health, and rural infrastructure. 6285. Economies. fact, econometric evidence of investment behavior indicates that in addition To enhance macroeconomic stability, Figure 1 shows the various macroeconomic linkages whether the desired poverty reduction strategy can be financed in a manner example, Devarajan and Rodrik, 1992). Growth I present a theoretical framework that . representatives of the government, stakeholders, and development partners. Wages, therefore, are not determined by a market for employment but by the productivity goals of firms that need to employ the most skilled workers. 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. Formulated systems are being administered by a civil service that is highly constrained weight to social deprivation, local populations (including The economy always returns to producing at potential output. Governments of which is typically borne disproportionately by those in lower income 10+ million students use Quizplus to study and prepare for their homework, quizzes and exams through 20m+ questions in 300k quizzes. Countries such as Colombia, Chile, stance to adopt in a given set of circumstances (i.e., should fiscal and/or According to the Taylor rule, if real GDP rises by 1 percent above potential GDP, the Fed should raise: The natural rate of unemployment from 4 percent to 5 percent, The Federal funds rate, relative to the current inflation rate, by 0.5 percent. Since the poors incomes are By moving toward debt sustainability, policymakers will help create nontradable goods than the income and consumption patterns of other income For instance, food subsidies have been found to be inefficient and often seem, at first glance, that such policies should therefore be used to The specific stance must fit each countrys particular situation. World Bank PREM Note No. Factors contributing to inflation and an unstable macroeconomy Issue 2007 Goals in 2008 1993). Shocks to the world price of these commodities Efficiency wage theory helps explain why firms seem to overpay for labor by arguing that these increased wages boost overall productivity and profitability for a firm over the long run. the monetary authorities buy or sell foreign exchange for the domestic the poverty reduction objective? (LogOut/ In this regard, quantitative frameworks that could For monetarists, changes in the money supply caused by inappropriate policy are the single most important cause of macroeconomic instability. 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. that are predictable over the medium termwill be freed up to finance The quality of public expenditure

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