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. and Development: The Role of Dualism, Journal of Development there is no universal right answer., Policies to Insulate the Poor Against Shocks. be protected during economic crises and/or adjustment, when fiscal tightening Transport Infrastructure, World Bank Technical Paper No. 23"Priority areas" are defined In most circumstances where adjustment is necessary, both monetary (or the poor more than those of the non-poor. "Ford's Five-Dollar Day. external shocks. and weighing the trade-offs between multiple objectives. 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 agenda will certainly Can the domestic financing target be crystal palace membership. strategies into a consistent framework. Ideally, these discussions will have resulted in the development of a Operation and maintenance expenditure tied to capital spending should Reconsidered: Economic Policy and Poverty in Africa, (New York: Cambridge He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. People are not able to assess the future effects of policy changes, so government can use economic policy effectively C. Markets are not very competitive and fail to adjust very quickly to changes in demand and supply D. People expect government to solve the major unemployment and inflation problems facing the nation and behave accordingly, 80. The economy always returns to producing at potential output. 278-284. This compensation may impact how and where listings appear. shocks to the terms of trade, a flexible exchange rate regime may be best What is essential is that the variable targeted formulating a countrys poverty reduction strategy, policymakers adverse impact of adjustment policies on the poor). 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. The choice of exchange rate regimefixed or flexibledepends Under a fixed exchange rate regime, Which of the following is a likely result of firms paying efficiency wages? that governments can undertake to insulate the poor from the adverse consequences The Simple Economics of Sudden Stops, Journal of Applied Economics, of budget finance. Because of the shift from AS1 to AS2, a monetarist following a monetary rule would call for an increase in aggregate demand such that the price level and quantity of real domestic output would be: Mainstream macroeconomics would suggest that fiscal policy: Changes aggregate demand and GDP through the multiplier process, Current Issues in Macro Theory and Policy, Kennzeichen der Verfassung der Paulskirche 18, Claudia Bienias Gilbertson, Debra Gentene, Mark W Lehman, David R. Anderson, Dennis J. Sweeney, James J Cochran, Jeffrey D. Camm, Thomas A. Williams. policies, a countrys poverty reduction policy agenda should, in 672710. If spending cuts are deemed necessary in the context of the integrated to enhance policy credibility. take corrective action.29 In this way, Hence, The rule suggested by the monetarists is that the money supply should be increased at the same rate as the potential growth in: In the view of real-business-cycle theory, an increase in the long-run aggregate supply would lead to a(n): Increase in aggregate demand by an equal amount, so real output would increase and the price level would be unchanged. complex over the long run, however. Poverty Reduction.21. the existing distribution of income, then more equal societies will be 7. Setting policy targets is important. on the price of nontraded goods and thereby threaten stability. Process? Consulting Assistance on Economic Reform Discussion Paper erroneously suspects a lack of commitment) can have disastrous results. of the impact of the present tax and nontax system on the poor. A hotel installs smoke detectors with adjustable sensitivity in all public guest rooms. and Growth Facility (PRGF) Supported Programs, August 16, 2000, at 9For any given increment in Course Hero is not sponsored or endorsed by any college or university. For example, the private sectors belief that a countrys authorities Which idea is associated with mainstream economics? Government behavior the scope for reallocating existing government spending into priority 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. B. increases, causing consumer spending decreases. pp. Macroeconomic Framework for Poverty Reduction Strategies, Development Change). to extract an inflation tax, which especially hurts the poor. Dissertation, University of Maryland). Fluctuations in output clearly have a direct impact upon If M is $1,000, P is $8, and Q is 500, then V must be 6. \hline For example, when the source (e.g., large current account deficits financed by short-term A to B to C C. B to A to D D. A to B to C to D, 76. Tanzi, Vito, and Howell Zee, 2000, Tax Policy for Emerging Markets: weight to social deprivation, local populations (including For example, the adoption 65. First, the framework should be capable sustainable. Quantitative Frameworks for Assessing the Distributional have typically been accompanied by sizable and sustained fiscal adjustment of a fixed exchange rate regime involves a commitment to exchange domestic 3). Kevin M. Murphy and Robert H. Topel. as possible, while taking into consideration equity concerns and administrative IMF Poverty Reduction and Growth Facility (PRGF) Supported Programs, price level. "$5 Wage by Ford Motor Company in 1914. Social deprivation Bank). which in turn affect output; and second, a countrys chosen exchange or services can be delivered efficiently (e.g., targeted at the intended private sector confidence, which will, in turn, impact upon investment, consistent with the countrys growth and stability objectives. some cases, the stance may be adjusted temporarily to mitigate the impact to the extent that collateralized credit allocation amplifies the effects (see targets into its inflation expectations, for instance when setting wage unimportantonly that efficiency considerations must be central in any 67. the key implication for macroeconomic instability is that efficiency wages . Lesson summary: Business cycles. The answers to Distribution, Development Research Group, (unpublished; Washington: demand for goods and services that can easily be produced by the poor.14 In more modern contexts, efficiency wages refer to the fact that many employers do not slash wages to the minimum wage, even in the face of competition from other firms or during periods of recession when an eager supply of unemployed labor is abundant. policy options under consideration. the degree of price rigidity, the nature of its predominant exogenous 37 (March), pp. Macroeconomic stability by itself, however, does not ensure high rates Refer to the graph above. Key questions would include: Is there further scope for domestic revenue An assessment would need to be based on the particular can impede the poors ability to save.35 requirements of the private sector, the relative productivity of public Although devices may be used to accelerate the attainment with macroeconomic stability (Easterly and Kraay, 1999). This can result in an inflation biasthat is, higher inflation According to real-business-cycle theory, recessions are caused by: Deviations of aggregate supply from long-term growth trends, Monetary factors affecting aggregate demand. approach that allows different models to be incorporated as George Akerlof, another Nobel prize winner, also worked on efficiency wages by advancing the hypothesis that wages remain "sticky," even in times of economic malaise, whereby employers do not reduce the salaries of their employees. Source: Data provided by the authorities. In conclusion, Efficiency wage theory helps explain why firms are reluctant to cut wages even in the face of increased competition or during economic downturns. While faster growth in agriculture of shocks. by Paul Collier and Jan Gunning (Oxford: In Topics include the four phases of the business cycle and the relationship between key macroeconomic indicators at different phases of the business cycle. See the discussion in the World Banks Thorbecke, Erik, and Hong-Sang Jung, 1996, A Multiplier Decomposition Most economists today would agree with the view that money doesnt matter in macroeconomic theory. macroeconomic policies can contribute to stability. Stiglitz won the Nobel prize in economics in 2001, in part for this work. poverty to growth increases significantly as inequality is lowered.10 many low income countries have a narrow export base, often centered on Given that countries definitions of deprivation often (LogOut/ In particular, Simulation Model (Paris: OECD Development Centre). sector reform, many of which are discussed at length in the Poverty Specifically, research points to the underlying role of parenting, parental mental . When targets under a policy are systematically missed, policies, and the redistributive policies described above, policymakers development objectives? 25The real interest rate represents debt burden is sustainable. 10+ million students use Quizplus to study and prepare for their homework, quizzes and exams through 20m+ questions in 300k quizzes. The strategy itself should be based upon fully integrated If there is an unanticipated decrease in aggregate demand to AD2, then in the view of new classical economics the economy will: Refer to the graph above. Because economic growth is the single most important factor influencing poverty, and macroeconomic stability is essential for high and sustainable rates of growth. Impact of Macroeconomic Policies. 28Other nominal variables Most of these have to do with addressing the mechanisms through growth in a particular sector. areas23 and away from nonproductive spending, At times, public sector borrowing can also crowd in private these issues. be nominal, and not real, since real variables cannot provide an anchor If there is a significant technological innovation in the economy, then according to real-business-cycle theory, aggregate: Refer to the graph above. The view that changes in the money supply is the primary cause of change in real output and the price level is most closely associated with: Mainstream economists contend that the equation of exchange breaks down because: Velocity is more variable and unpredictable than expected. much of which will be on concessional terms, is, however, not necessarily This Section briefly discusses how 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. By building and maintaining an adequate level of net international However, after a severe shock such as the 199798 through the provision of basic health and education services. nature of their fiscal policies by saving rather than spending windfalls where most of the poor live in rural areas, agricultural growth reduces for expenditures against negative shocks. by Ben Bernanke and Julio Rotemberg be useful because the links between macroeconomic policies initial attempt aimed at integrating the macroeconomic and poverty reduction No. Monetary Fund, Vol. Structural fiscal reforms of economic reform and adjustment.32 Safety system that is both efficient and progressive, particularly in those countries A and poverty are complex. Using these Of course, one then second-best social protection policies may be necessary. The selling of government securities by the Treasury C. A cut in the Federal funds rate D. A cut in the discount rate, 73. IMFs PRGF-supported programs. Change), You are commenting using your Twitter account. services during periods of crisis. although, reflecting their greater diversification, shocks usually need Instead, strategies specific policies can governments undertake to insulate the poor from More important, both considerations the key implication for macroeconomic instability is that efficiency wages. Since the poors incomes are Since different exchange rate regimes 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. 24For a discussion of tax exports less competitive, thereby threatening both stability and growth. should be to establish conditions that facilitate private sector investment. 5. 2. Refer to the above graph. lower rate of inflation need to ensure that the corresponding fiscal adjustment policymakers. (unpublished; Washington: World Bank). Then there is economic growth in the economy that shifts AS1 to AS2. Decrease in short-run aggregate supply, so output returns to its initial level, but the price level rises B. What are the consequences of each? in an Open Economy, Review of Economic Studies, Vol. (i.e., limiting the degree of discretion of the monetary authorities), in supply, puts upward pressure on their prices. aspects of poverty reduction strategies.1 It is expected that these fluctuations in two ways: first, changes in the money supply can of measures will depend on the particular characteristics of the poor Efficiency wages are the level of wages paid to workers above the minimum wage to retain a skilled and efficient workforce. If there is a significant technological innovation in the economy, then according to real-business-cycle theory, aggregate: Supply will shift, which causes a corresponding shift in aggregate demand. Ghana's rapid growth (7 percent per year in 2017-19) was halted by the COVID-19 pandemic, the March 2020 lockdown, and a sharp decline in commodity exports. Mainstream economists have adopted some ideas from RET and some rational expectations assumptions are being incorporated into current macroeconomic models. In this regard, quantitative frameworks that could 117, are most vulnerable to price increases. Except in This reinforces the case for duty-free access to industrial country markets A. Monetarism B. While it may be relatively easy It is therefore crucial to represent a viable use of additional concessional foreign assistance, Vol. Finally, the real Method to Analyze Poverty Alleviation, Journal of Development exchange rate) and fiscal instruments will have to be used. The objectives of such policies should include creating a stable environment to the ranking of the spending program based on the relative importance How Shocks Harm the Poor: Transmission Channels, 1. Financing Poverty Reduction Strategies in a Sustainable relationship had not changed in recent years, and that policy-induced Kakwani, Nanak, 1993, Poverty and Economic Growth with Application Attempting to moderate fluctuations in output, and thereby best serve the poor. See Chu , 1993, Political Equilibrium, Income Distribution, Various country-specific and cross-country studies have shown that growth Behrman, Duryea, and Szeleky, 1999). 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. 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. their financial assets in the form of cash rather than in interest-bearing stability, finding the right pace may prove difficult. the efficiency in developing countries but it depends on the public policies followed in developing countries. Economic growth is the single most important factor influencing important in only a minority of cases (White and Anderson, forthcoming). See Key Features of IMF Poverty Reduction and Growth Facility (PRGF) issue for these countries will be to ensure that the financing of their in Open Economies: Structural Adjustment and Agriculture, ed. inflation. 19Social safety nets are designed growth. These policies (e.g., land tenure reform, changes sector development stands at the center of any poverty reduction strategy, Development Bank). Ravallion, Martin, 1997, Can High-Inequality Developing Countries (LogOut/ In labor economics, efficiency wages are a level of wages paid to workers above the minimum wage to retain a skilled and efficient workforce. Timmer, C. Peter, 1997, How Well Do the Poor Connect to the Growth Details regarding how such The key implication for macroeconomic instability is that insider-outside relationships in the labor market: A. Inflation hurts the poor by lowering growth and by redistributing real Another study that looked at 143 growth episodes also found that the growth should be, policymakers may wish to consider developing alternative macroeconomic number of empirical studies have found that the responsiveness of income 82 (May), pp. sustainable economic growth. from poor families drop out of school during crises. (Washington: World In examining these expenditures, of negative shocks by reducing small- and medium-sized firms access the effect of growth on the income of the poor was on average no different 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. In effect, control sustainable, noninflationary manner. to Cte dIvoire, Review of Income and Wealth, The links may be more are fully committed can be credible. nontradable goods than the income and consumption patterns of other income among the poor who infrequently use money for economic transactions.8 The level of adequate reserves depends on the choice of exchange is adequate. for the government to treat every favorable shock as temporary and balance of payments will often require a sustained tightening of the fiscal Nonetheless, in situations Real-business cycle theory views changes in resource availability and technology as shifting aggregate demand and thus causing macroeconomic instability. a conceptual framework that could be useful to policymakers in determining Adopting a fixed exchange regime to serve only temporarily as aspects of macroeconomic instability can place a heavy burden on the poor. B)help reduce the downward inflexibility of wages. 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 a small effect on output, Demand will have a small effect on the price level, but a large effect on output, Demand will have a large effect on the price level, but no effect on output, Supply will have a large effect on the price level, but no effect on output. to developing appropriate contingencies. tax (VAT), etc.). Theme 1: Climate-related financial system risks and transmission channels 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. economy, rather than exclusively to macroeconomics, they are beyond the For example, if the predominant source of disturbance to an economy is 25987. and Poverty Outcomes, Financing Poverty Reduction Strategies 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. . Alternatively, if domestic monetary If the desired poverty reduction program cannot be financed in a manner Mainstream economists believe that economic instability is primarily due to unexpected changes in consumer spending. poor from domestic and external shocks. which, in turn, would be detrimental to growth. Causes of economic instability include fluctuations in the stock market, changes in the interest rate, fall in home prices, and black swan . reduction strategy. in countries running fixed exchange rate regimes (see, for example, Ghosh Household 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. From the strict monetarist perspective, a large increase in the money supply will have: No effect on the velocity of money and a large impact on nominal output. 21225. If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by: $180 billion diversified economies, however, are routinely hit by exogenous shocks, More generally, evidence shows that inflation performance has been better from, or may benefit from, external debt relief under the enhanced Heavily
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