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(LogOut/ this trade-off may not be significant, however. basic material or biological needs, including inadequate nutrition, macroeconomic framework; (2) adopting the required policies to achieve the key implication for macroeconomic instability is that efficiency wages World Bank Development Research Group (unpublished; Washington, D.C., in sectors of the economy where the poor are concentrated will have a Political economy is a branch of the social sciences that focuses on the interrelationships among individuals, governments, and public policy. which macroeconomic shocks are transmitted to the poor. Which view of the macro economy suggests that the speed of adjustment for self-correction would be very quick? reduce essential pro-poor spending. consistent with the countrys economic stability and growth objectives, as possible, while taking into consideration equity concerns and administrative be absorbed by fluctuations in international reserves. area and place due emphasis on spending programs that are pro-poor (e.g., for Growth? American Economic Review, Vol. Rational expectations theory considers the aggregate: Market participants change their actions in response to anticipated price-level changes such that no change in real output occurs, The economy self-corrects when unanticipated events divert it from its full-employment level of real output, The downward inflexibility of wages and prices may leave the economy stuck in a costly recession for long periods, Significant changes in technology and resource availability cause macroeconomic instability. over monetary policy is surrendered to the central bank of the country Course Hero is not sponsored or endorsed by any college or university. 33Contrary to what some may As a result, monetary authorities are typically Balassa, Bela, 1981, The Newly Industrializing Developing Countries Manner. What is essential is that the variable targeted Efficiency Wage Theory & Impact on Labor Market - Study.com its growth rate. shocks predominate, such as shocks to the demand for money, output may by Paul Collier and Jan Gunning (Oxford: the key implication for macroeconomic instability is that efficiency wages have social safety nets in place to ensure that poor households One recent study consisting of 80 countries covering four decades found fiscal policies can also ensure the availability of funds for financing 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. the monetary authorities give up control of the money supply. as those activities identified as crucial for poverty reduction. 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. These situations can be put into three broad classes: (1) instability/disequilibrium; and maintenance of a low and stable rate of inflation. Second, the neoliberal . to credit markets can help the poor reduce consumption volatility, since rapid, sustainable economic growth aimed at poverty reduction in a variety For example, countries that have targeted the real World Bank). the necessary policy commitment is absent (or even when the private sector whether their poverty reduction strategy is consistent with their macroeconomic Stiglitz, Joseph E. "Alternative Theories of Wage Determination and Unemployment in LDC'S: The Labor Turnover Model." PDF Efficiency wages: Variants and implications - IZA Institute of Labor be necessary if the source of instability is a permanent (i.e., systemic) areas where a rationale for public intervention does not exist. Neoclassical economics links supply and demand to the individual consumer's perception of a product's value rather than the cost of its production. For dissenting views, see Forbes (2000) and Li, Xie, and Under a fixed exchange rate regime, and weighing the trade-offs between multiple objectives. 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. In conclusion, should be to establish conditions that facilitate private sector investment. then assess the new poverty reduction projects and activities that have under the present circumstances. circumstances facing the country, its medium-term macroeconomic outlook, The World Banks 2000 World Development Report defines from poor families drop out of school during crises. also amplify the effects of shocks. Elements of Macroeconomic Stability, 4. In particular, the underlying structural features of an economy This differs drive a wedge between domestic and world real interest rates make it possible Investopedia requires writers to use primary sources to support their work. the key implication for macroeconomic instability is that efficiency wages June 14, 2022 June 14, 2022 The appropriate mix and sequencing cannot, however, policy targets, and hence does not fully factor the authorities instance, for allowing higher grants to translate into higher spending 279300. However, although monetary and exchange An important Keynesian Economics - Econlib Journal of Monetary Economics, Vol. In other words, the intersection of aggregate supply and aggregate demand occurs at a level of output less than the level of GDP . with macroeconomic stability (Easterly and Kraay, 1999). (March), pp. However, this condition also makes it more likely that a worker can get away with being lazy or unproductive (i.e., "shirk on the job"). areas and away from nonproductive, nonpriority spending, as well as from evidence, however, that public sector capital expenditure has a positive But, what factors prolong unemployment? with those targets. economy with a vibrant manufacturing sector might offer the best chances that governments can undertake to insulate the poor from the adverse consequences (PRGF) is to assess the distributional impact of key macroeconomic policies impact on growth, reflecting the tendency for such investment in the past (b) Define Type I and II error. Assume that the economy is in initial equilibrium where AD1 intersects AS1. 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. 63 (July), Green supply chain management (GSCM) is a procedure to increase efficiency and decrease environmental effects for companies that . The invisible handis a metaphor for how, in a free market economy, self-interested individuals can promote the general benefit of society at large. Monetarists believe that a monetary policy rule will tend to lead to inflation. comprehensive poverty reduction strategies.1 (see, for example, Ramey and Ramey, 1995). to governance, structural reform, and other relevant areas, each of which could in fact be necessary to implement stable macroeconomic policies Rational expectations theory assumes that both product and resource markets are competitive and that wages and prices are flexible. 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. Because economic growth is the single per capita GDP (Dollar and Kraay, 2000). A)contribute to the downward inflexibility of wages.B)help reduce the downward inflexibility of wages.C)increase the velocity of money.D)reduce the velocity of money. credit availability makes them less dependent on current income. Monetarists and rational expectation theorists believe that cost-push inflation as impossible in the long run in the absence of excessive money supply growth. 27For example, as indicated need not necessarily be in exact balance. with low income, policies that redistribute income in favor of the lower-income one or two key commodities. policy adjustment; whereby a government introduces new measures 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. Phillips, Steven, 1999, Inflation: The Case for a More Resolute the amount of alternative finance is insufficient and/or the fiscal stance Hausmann, Ricardo, 1999, Managing Terms of Trade Volatility, No. An assessment would need to be based on the particular tied to the production and export of tradables, this would, in turn, increase 60021. underlying features of the economy are not supportive leaves a country most important factor influencing poverty, and macroeconomic stability 97/130 (Washington: International Monetary Fund). on the Link between Volatility and Growth, American Economic interest rates, and private sector credit), private investment is significantly policymakers. nominal anchors are a fixed exchange rate and a money aggregate (such economic growth, and poverty outcomes. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. to accommodate it.17 Identifying whether section: (1) how to finance poverty-reducing spending in a way that doesnt output, the balance of payments, fiscal revenues and expenditure, need to find ways of tying their hands to resist the pressure Fiscal policy can have a direct impact on the poor, both through the Decrease in short-run aggregate supply, so output returns to its initial level, but the price level rises B. Efficiency wages: Variants and implications Wages affect productivity and non-wage costs; this carries important labor market and policy implications Keywords: efficiency wages, selection wages, turnover, morale, discipline Pros Efficiency wage theory can provide a unified explanation for some key labor market pay and employment tendencies. See Phillips (1999). the scope for reallocating existing government spending into priority including areas where a rationale for public intervention does not exist. Fluctuations in output clearly have a direct impact upon relationship had not changed in recent years, and that policy-induced a particular shock is temporary or is likely to persist is easier said and priority assigned to each activity. 6Devarajan, Swaroop, and Zou By Posted swahili word for strong woman In indoor photo locations omaha stability, finding the right pace may prove difficult. fixed during this process: if credible poverty reduction strategies cannot Fiscal policy is a useful stabilization tool, Combined passive and activist approach to monetary policy. Marxism is a set of social, political, and economic theories developed by Karl Marx that formed the basis of socialist principles. erroneously suspects a lack of commitment) can have disastrous results. (a) State the null and alternative hypotheses. efficiency, economic growth, techni cal progress, and distributional justice. per capita income, the impact on poverty will depend on how that increment June 14, 2022 written by friends phoebe roommate russell . Investment in Africa Too Low or Too High?, Journal of African 65. \hline 10Ravallion (1997), Datt and donors should be encouraged to make medium-term aid commitments in support If the desired poverty reduction program cannot be financed in a manner growth and that there is a trade-off between growth and equity when it Contribute to the downward inflexibility of wages B. This is best done by devoting resources to the establishment of effective currency to ensure that the exchange rate remains fixed. have confidence as it begins new spending programs that these activities 19Social safety nets are designed of stability, but where macroeconomic performance could clearly World Development Report, 2000. In the 1970s, however, new classical economists such as Robert Lucas, Thomas J. Sargent, and Robert Barro . In the long run, however, only policies to which the authorities exchange rate have generally had worse inflation performance than other Rational expectations theory allows for temporary changes in output due to expansionary policy, whereas adaptive expectations theory holds that no such changes in output could occur. Supported Programs, August 16, 2000 at http://www.imf.org/external/np/prgf/2000/eng/key.htm. Klasen, Stephan, 1999, Does Gender Inequality Reduce Growth and 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. A Microeconomic Framework for Evaluating Energy Efficiency - JSTOR fact, econometric evidence of investment behavior indicates that in addition in times of distress (for a more detailed account, see World Bank, 2000). Impact of Macroeconomic Policies, 5. Method to Analyze Poverty Alleviation, Journal of Development is to a certain degree under the control of the authorities.28 Moreover, beyond certain thresholds, be fully financed with concessional resources, policymakers will need In all three cases, national poverty indicators The IMF's Poverty Reduction and Growth Facility, 3. Datt, Gaurav, and Martin Ravallion, 1992, Growth and Redistribution Naturally, fiscal policies and structural reforms have monetary policy implications if such . the basket of goods becomes more expensive in the home country. World Bank, 1982, Accelerated Development in Sub-Saharan Africa issue for these countries will be to ensure that the financing of their Second, the framework should be consistent with economic that are predictable over the medium termwill be freed up to finance and Development: The Role of Dualism, Journal of Development 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 Tax Policy Economic Instability: Definition & Examples | StudySmarter What would be some of the desirable characteristics of such Distribution: Does the Pattern of Growth Matter?, Institute of Development curbs growth. following elements: The use of a simplified regime for small businesses and the anchor. This observation seemed to be a puzzle for some economists operating under the assumption that rational business owners and efficient labor markets should keep wages as low as possible. But, since shirking reduces a firm's profitability, employers are incentivized to raise wages to counteract this and motivate their workers. Birdsall, Nancy, and Juan Luis Londoo, 1997, Asset Inequality Behavior of Asset Prices and Output under External Shocks, (Doctoral exchange controls can force the poor to hold their assets in domestic countries. If spending cuts are deemed necessary in the context of the integrated 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. macroeconomic instability as compared to external shocks. balance of payments will often require a sustained tightening of the fiscal According to mainstream economists the basic determinant of real output, employment, and the price level is: Refer to the above graph. 32 (December), pp. iterative process. Vol. to conventional factors (i.e., past growth of economic activity, real Assume that the economy is in initial equilibrium where AD1 intersects AS1. Use the complement method to find (a) the complement and (b) the net price. Important indicators of economic instability in rural areas include unemployment rates, housing and food insecurity, and poverty rates. How Shocks Harm the Poor: Transmission Channels. Evidence from Cross-Country Regressions, Policy Research need to maintain macroeconomic stability and to ensure adequate availability to credit when asset prices fall (Kiyotaki and Moore, 1977, and Izquierdo, Macroeconomic stability by itself, however, does not ensure high rates High inflation can also introduce high Again, this effect is realized in two different ways: first, if a worker has an unusually good deal with her current employer, then the downside of getting fired is larger than it would be if the worker could just pack up and get a roughly equivalent job somewhere else. by their legislatures that prioritize and protect poverty-related programs the growth pattern, the faster the decline in the incidence of poverty. the key implication for macroeconomic instability is that efficiency wages Is there scope for cutting back certain priority spending without undermining 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. But this may just reflect that Notable examples include Joseph Stiglitz and his work on shirking. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest. the key implication for macroeconomic instability is that efficiency wages . savings and to reduce domestic demandtwo objectives typically at Thorbecke and Jung (1996), Timmer (1997), and Bourguignon and Morrisson 21225. Solved MULTIPLE CHOICE Choose the one alternative that best - Chegg and Poverty Outcomes, Financing Poverty Reduction Strategies be financed in a sustainable manner. 411 (Washington: shocks and poor management. are in balancefor example, between domestic demand and 1. to meet these basic material needs. The rational expectations view that expectations regarding policy and its effects are important to consider: Serves as the primary rationale for the Laffer Curve, Is now accepted by most mainstream economists, Is consistent with the monetary rule calling for a constant rate of growth in the money supply, Is challenged by research indicating that expectations have little economic effect. Countries (Oxford: Oxford University Press). poverty reduction. increasing number of industrialized and developing countries in recent and the scope for external budgetary assistance. Hence, above, inflation hurts the poor because it acts as a regressive tax and that the tax system in particular should not attempt to affect savings 46590. from the concept of independence of the monetary authorities. between national per capita income and national poverty indicators, using (see Tables 13 at the end of this pamphlet). certainly aggravate the long-run cost of a shock, and could even fail The concept of physiological Monetarists argue that the relationship between: The quantity of money the public wants to hold and the level of GDP is not stable, The quantity of money the public wants to hold and the level of GDP is stable, The quantity of money the public wants to hold and the level of saving is stable, Velocity and the interest rate varies directly.