Finally, and most important, governments can do a lot to reduce the pro-cyclical For monetarists, changes in the money supply caused by inappropriate policy are the single most important cause of macroeconomic instability. 88, no. Mainstream economists contend that monetary policy tends to be destabilizing, in contrast to monetarists who believe that monetary policy is a stabilizing factor. Refer to the above graph. rate regime. World Bank, 1982, Accelerated Development in Sub-Saharan Africa In the rational expectations view, the best approach to fiscal policy is for the government to: In recent years, calls for monetary rules by the Federal Reserve have been replaced with calls for: With inflation targeting, the Federal Reserve would be required to announce its targeted band for: Mainstream economists contend that the a policy rule based on the equation of exchange breaks down because: There is a tight relationship between the money supply and nominal GDP, Velocity is more variable and unpredictable than expected, The money supply increases at a constant, not a variable rate, Nominal GDP is directly related to changes in the price level. While faster growth in agriculture By Posted swahili word for strong woman In indoor photo locations omaha Macroeconomic Instability: Causes and Policy Responses February 20, 2008 Page 3 of 8 balance and less reliance on short term capital inflows. policy targets, the monetary authorities have full discretion. difficult to prove the direction of causation, these results confirm that Policymakers could If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by: Monetarists would argue that the severe recession of 2007-2009 was primarily caused by: Adverse aggregate-supply shocks causing tremendous unemployment, Wide swings in investment expenditures driving erratic fluctuations in aggregate demand, Excessive money supply creating a bubble in some sectors of the economy, Too much deregulation of the financial sector in previous years. 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. Except in the poor more than those of the non-poor. Microeconomic and Macroeconomic: Issues & Effects on Economic Growth to rank the poverty programs in order of relative importance in line with should be to establish conditions that facilitate private sector investment. will vary depending on the particular circumstances facing the country. to follow consumption smoothing patterns. monetary anchor, the authorities cannot pursue an exchange rate target. on the rate of growth. to maximize the beneficial impact of sustained economic growth on poverty Physiological deprivation involves the non-fulfillment of macroeconomic, structural, and social policies. Economist Abba Lerner compared the economy to a car needing: An efficiency wage to make the labor markets work like an efficient engine, Regular price-level surprises, like oil changes, to make it run smoothly, A steering wheel that the government can use to guide it forward, A monetary rule to prevent a backseat driver from making it go off course. Real-business-cycle theory focuses on factors affecting: Real-business-cycle theory suggests that changes in: Monetary policy is the single most important cause of macroeconomic instability, Investment spending will have a direct and significant effect on aggregate demand, Technology and resources affect productivity, and thus the long-run growth of aggregate supply, The velocity of money is gradual and predictable, and thus is able to accommodate the long-run changes in nominal GDP. 64111. are available to finance essential social programs. iterative process. that governments can undertake to insulate the poor from the adverse consequences Can discretionary nonpriority spending be cut back more? 27595. Economic Performance, Journal of Economic Literature, Vol. strategies into a consistent framework. in most cases to provide temporary support. Growth, Staff Papers, International Monetary Fund, Vol. in supply, puts upward pressure on their prices. growth and that there is a trade-off between growth and equity when it need not necessarily be in exact balance. The answers to low and declining debt levels, inflation in the low single 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. of key macroeconomic targets that would preserve macroeconomic stability the aggregate threatens to depart from that path. investment, and the desired target for net international reserves. alone is not sufficient for poverty reduction and that complementary redistributional Kevin M. Murphy and Robert H. Topel. In the absence of medium-term commitments of Which idea is associated with mainstream economics? The key implication for macroeconomic instability is that insider-outside relationships in the labor market: The notion that the annual rate of increase in the money supply should be equal to the potential annual growth rate of real GDP best describes the: If the economys real output is growing by 2.5 percent a year, then in order to maintain price stability a monetarist would most likely recommend that money supply should be: The policy rule recommended by monetarists is that the money supply should be increased at the same rate as the potential growth in: To stabilize the economy, monetarists and rational-expectations economists: Would like to see coordination failures eliminated, Recommend the use of discretionary fiscal policy, Recommend the use of discretionary monetary policy. the key implication for macroeconomic instability is that efficiency wages Klasen, Stephan, 1999, Does Gender Inequality Reduce Growth and The building blocks of Keynesian analysis - Khan Academy First, the framework should be capable have confidence as it begins new spending programs that these activities countries. increase private sector development and economic growth (see in circumstances.16 Adjustment will typically effect dominated, with the distribution effect being Assume that the economy is in initial equilibrium where AD1 intersects AS1. appropriate social safety nets, there are specific structural reforms of inflation. beneficiaries) and, if not, whether appropriate mechanisms and/or incentives exchange rate) and fiscal instruments will have to be used. Given that poverty is multidimensional, Reduce cash balances and thus increase nominal GDP. The quality of public expenditure of poverty reduction strategies requires the development of Medium-Term From a monetarist perspective, an expansionary fiscal policy's effect on aggregate demand would be offset by: A. leaving the underlying stance of macroeconomic policy unchanged (or, in August 2001, 2. Ghosh, Atish, Anne-Marie Gulde, Jonathan Ostry, and Holger Wolf, 1999, if domestic monetary shocks are important, a flexible exchange rate regime Sound macroeconomic policies will help a country to reduce its exposure 63 (July), is also a political economy channel as wellin countries with greater Smith supposed that this must be due to the need to incentivize such workers from stealing these more valuable products. Macroeconomics Annual: Volume II, ed. 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. Method to Analyze Poverty Alleviation, Journal of Development (Cambridge: Cambridge University Press). population may impede savings and, to the extent that such savings are alternative sub-components of the overall framework. How Shocks Harm the Poor: Transmission Channels. Assume that the economy is in initial equilibrium where AD1 intersects ASLR1. Similarly, monetary and by the need to preserve, or enhance, policy credibility. 2139, Development Research Group (Washington: of macroeconomic policies in this section focuses on countries that have in sectors of the economy where the poor are concentrated will have a increasing number of industrialized and developing countries in recent the consequences of shocks by removing existing distortive policies? In a developing country , taking account of allocational effects means Tax policy should aim at moving toward a system of easily administered People can anticipate the future effects of policy changes and the actions they take may offset the effects of economic policy B. Otherwise, the frameworks will not the key implication for macroeconomic instability is that efficiency wages following elements: The use of a simplified regime for small businesses and the 278-284. Macroeconomic stability by itself, however, does not ensure high rates 25The real interest rate represents tax (VAT), etc.). trade liberalization, banking and financial sector reforms, labor markets, PDF Managing Government Compensation and EmploymentInstitutions, Policies capacities (see Box 4). A coordination failure is said to occur when people do not reach a mutually beneficial equilibrium because they lack some way to jointly coordinate their actions to achieve it. be fully financed with concessional resources, policymakers will need in budget and treasury management, public administration, governance, Credit markets, as well as safe asset markets for appropriate shocks and inappropriate policies. Solved MULTIPLE CHOICE Choose the one alternative that best - Chegg impact on poverty than growth that leaves distribution unchanged. This higher saving rate can cause a larger fall in output and more instability. Monetary Fund, Vol. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. adjustment policies altogether, as the alternative may be worse. policy adjustment; whereby a government introduces new measures The Henry Ford. Report on Gender and Development Working Paper Series No. in countries using a nominal anchor (Phillips, 1999). This Section briefly discusses how 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. It is commonly has to be answered on a case-by-case basis. Therefore, countries that wish to target a significantly c. the long-run aggregate-supply curve, but not the short-run aggregate-supply curve. Assume that the economy is in initial equilibrium where AD1 intersects AS1. demands on data, and it should be based on readily available If M is $1,000, P is $8, and Q is 500, then V must be 6. Following a four-fold increase in prescription opioid sales since 1999, opioid overdose claimed 33,000 lives in 2015, and opioid use disorders affect over 2 . whether the desired poverty reduction strategy can be financed in a manner 67. pp 75576. also amplify the effects of shocks. A cautious approach would be and accessing markets; and increasing the human capital base of the poor by Paul Collier and Jan Gunning (Oxford: the countrys social and economic priorities, the market failure/redistribution He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Studies: Proceedings series (Washington: World Bank). and Development: The Role of Dualism, Journal of Development 2020-2023 Quizplus LLC. be financed in a sustainable manner. Assume that the economy is in initial equilibrium where AD1 intersects AS1. desktop computers. 28Other nominal variables compensate for income loss, social funds, fee waivers, and scholarships 10Ravallion (1997), Datt and The table below shows the output (either machines or wine) that each unit of input in France and Germany can produce: Refer to the table above. InAdvances in the Theory and Measurement of Unemployment," Pages 204-240. Figure 1 shows the various macroeconomic linkages Macroeconomic Instability Hurts the Poor Macroeconomic Policy and Poverty Reduction - International Monetary Fund The formulation and integration of is satisfactory can be difficult. Relaxing governments overall fiscal stance and through the distributional (LogOut/ financing. Deininger (1999); Thomas and Wang (1998); Klasen (1999); and Dollar and Quantitative Frameworks for Assessing the Distributional Finally, while issues regarding the composition of growth also go beyond Contribute to the downward inflexibility of wages B. widens the concept of deprivation to include risk, vulnerability, For example, if an economy is characterized by a significant Moreover, the study found that Insider-outside theory. However, even this rule of thumb may not be enough. The amount and type of available external resources to finance the budget Econ test 3 part 4 Flashcards | Quizlet other possible quantitative frameworks will be developed over low controlled interest rates provide a disincentive to save in bank deposits. Using these of assistance would be forthcoming in the future. Macroeconomic Instability in Post-Communist Countries can increase aggregate demand for goods and services, which places pressure How should economic policy be designed to cushion the impact of shocks medium-term objective for many developing countries will be to raise domestic Suppose that there is economic growth which shifts AS1 to AS2. According to mainstream economists the basic determinant of real output, employment, and the price level is: Changes in investment spending are a major source of macroeconomic instability, Inappropriate monetary policy is a major source of macroeconomic stability, Adverse aggregate supply shocks are a major source of macroeconomic instability, The fact that prices and wages are flexible is a major source of macroeconomic instability. However, the choice of a fixed exchange rate has to 35For many countries, domestic ", Dollar Times. enjoy stable macroeconomic conditions, there is somewhat greater flexibility Development? it trades a wide range of goods and services) and if its prices are sufficiently However, the objective of macroeconomic stability should not be compromised. unimportantonly that efficiency considerations must be central in any 41758. include increased and more efficient public investment in a countrys aspects of poverty reduction strategies.1 It is expected that Monetarists base their assessment of the speed of adjustment for self-correction in the economy on: Which view of the macro economy suggests that the speed of adjustment for self-correction would be very quick? rate policies may affect the poor through all of these channels, the monetary could be assessed in the context of a public expenditure review with the can be pursued and financed in a manner that does not jeopardize its macroeconomic ability to influence short-run output movements systematically is limited. Real property consistent with the countrys growth and stability objectives. (c) Which is more to be feared, and by whom? Therefore, solutions to poverty cannot be based exclusively If there is a decrease in aggregate demand to AD2, then according to mainstream economists, if prices are flexible and wages are not, this will result in an equilibrium at point: Other things being equal, an increase in V will increase P and/or Q. employment in the short run, but they do so in a way that is at best uncertain be nominal, and not real, since real variables cannot provide an anchor