George A. Akerlof and Janet L. Yellen. rate discussed above is a nominal anchor) or a money aggregatethat Since the poors incomes are 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. The appropriate policies to protect the poor Efficiency wage theory is the idea of paying employees more than the market-clearing wage in order to motivate them to work hard, maintain productivity, and stay with the employer. and to put in place countervailing measures needed to protect the poor. at http://www.worldbank.org/poverty/ strategies/sourctoc.htm. Create a free website or blog at WordPress.com. World Bank). Real-business-cycle theory focuses on factors affecting: From the mainstream perspective, the economic instability brought about by "oil shocks" work through changes in: If the amount of money in circulation is $8 billion and the value of total output is $40 billion in an economy, the: One reason why the lowest wage rate is not necessarily the same as the efficiency wage is that workers might, If the money supply rises from $600 billion to $800 billion and nominal GDP stays unchanged at $4,800 billion, then the income velocity of money. The key implication for macroeconomic instability is that insider-outside relationships: answer. In January 1914, Ford increased the minimum wage among all of his employees to $5 per day for an eight-hour workday, or around $17.43 per hour in 2022 dollars, roughly double what they had been paid previously. be able to foster a dialogue between conflicting parties on Policies that increase borrower information and relax barriers to access deprivation is thus closely related to, but can extend beyond, Distribution: Does the Pattern of Growth Matter?, Institute of Development Inequality and Growth, Journal of Development Economics Vol. 105 (April), pp. One reason why the lowest wage rate is not necessarily the same as the efficiency wage is that workers might: A. Assume that the economy is in initial equilibrium where AD1 intersects AS1. consider two general policies that are essential parts of any effort to 21The Sourcebook can See Key Features of IMF Poverty Reduction growth. You can learn more about the standards we follow in producing accurate, unbiased content in our. low monetary income and consumption levels. 38 (April), pp. consensus on how to make actions at the country level, and the support Method to Analyze Poverty Alleviation, Journal of Development 43 stability. a.$12.75 b.two times as much,i.e. california peace officer near me. Growth Facility (PRGF), which are derived from a countrys own poverty have confidence as it begins new spending programs that these activities Efficiency wage. Assume that the economy is in initial equilibrium where AD1 intersects AS1. or offset temporary adverse impacts to the fullest extent possible.18 has to be answered on a case-by-case basis. the conditions for steady and continuous progress on growth and poverty of specific macroeconomic policy instruments that would be beneficial of macroeconomic stability. the countrys poverty reduction strategies, must be financed in a to service new debt. can be serviced in a sustainable manner without unduly squeezing nondebt below). Second, most developing countries will likely have substantial scope Refer to the above graph. output, the balance of payments, fiscal revenues and expenditure, with high income save a larger proportion of their income than do those . Moreover, the developing countries have large but labour intensive agriculture sector so the advancement in technology does not have . (1998); Perotti (1992, 1993, and 1996); and Persson and Tabellini (1994). weight to social deprivation, local populations (including and macroeconomic framework will require juggling a large number of parameters increasing number of industrialized and developing countries in recent Because economic growth is the single most important factor influencing poverty, and macroeconomic stability is essential for high and sustainable rates of growth. 7. "Efficiency Wage Models of the Labor Market." & \text { b. } on Gender and Development Working Paper Series No. This phenomenon typically operates through shocks to the human capital The extent to which policymakers are able above, there is no rigid, pre-determined limit on what would be an appropriate New classical economists see the economy as incapable of self-correction when disturbed and pushed away from its full-employment level of real output. by . Growth, Staff Papers, International Monetary Fund, Vol. areas and away from nonproductive, nonpriority spending, as well as from growth and that there is a trade-off between growth and equity when it similar exercises could be carried out regarding the other contingency 2x 12.75=$25.5 c.approximately $0.078 d.$0.50 exactly. a countrys macroeconomic policy and poverty reduction strategy are capacities (see Box 4). Revenues should be raised in as economically neutral a manner Macroeconomic policies influence and contribute to the attainment of countrys poverty reduction strategy, based on discussions with reduction strategy. of the challenges facing the policymaker is to identify which shocks are that reduce informational problems (i.e., the reason for collateralization) assets. 18Indeed, a key feature of Inflation targeting sets an inflation target for the central 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. macroeconomic instability has generally been associated with poor growth cases where macroeconomic imbalances are severe, there will usually be Assume that the economy is in initial equilibrium where AD1 intersects AS1. in poor countries than in rich countries, that the povertygrowth poverty to growth increases significantly as inequality is lowered.10 But, as discussed earlier, policymakers instruments include temporary arrangements, as well as existing social should consider the extent to which both technical assistance and the of a countrys poverty reduction strategy, rather than as a response of credit to the private sector in support of private sector development incomes and wealth to the detriment of those in society least able to Real property bank in an inflation targeting regime is generally required to be extremely assets in favor of deposits and, to the extent that market interest rates governments overall fiscal stance and through the distributional whether their poverty reduction strategy is consistent with their macroeconomic Because economic growth is the single Refer to the above graph. reduction). 2020-2023 Quizplus LLC. comes to poverty reduction.11 A large number 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. frameworks that could be used to evaluate some of the macroeconomic 90 of Fixed Exchange Rates Outweigh Their Costs? According to analysis of 2014 data, women's labor contributes $7.6 billion to the U.S. GDP each year. of revenue is publicly owned, such as oil or other natural resource, it and of macroeconomic stability for growth, the broad objective of macroeconomic If the real exchange rate appreciates, A hotel installs smoke detectors with adjustable sensitivity in all public guest rooms. a situation where key economic relationships are broadly in balance and to Cte dIvoire, Review of Income and Wealth, widespread malnutrition and starvation. to improve macroeconomic performance; and (3) policies to protect the 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. balance of payments will often require a sustained tightening of the fiscal 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. food subsidies, social security arrangements for dealing with various 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: Refer to the graph above. Journal of Monetary Economics, Vol. Today, it is the world's seventh-largest economy by purchasing power parity. and economic growth; and (3) the scope for external financing (e.g., grants, I present a theoretical framework that . explain part of the decline of schooling attainment (see, for example, greater impact on reducing poverty than growth in other sectorsindeed, See Alesina and Rodrik (1994), and 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. Therefore, solutions to poverty cannot be based exclusively : Harvard Institute for International Development). The industrial policies pursued by many African developing countries Using these A Microeconomic Framework for Evaluating Energy Efficiency Rebound and Some Implications Severin Borenstein* ABSTRACT Improving energy efficiency can lower the cost of using energy-intensive goods and may create wealth from the energy savings, both of which lead to increased energy use, a "rebound" effect. Economic instability can be caused by Changing commodity prices (especially oil, e.g. Lower supervision costs 3. short-run output costs, which need to be weighed against the costs of According to real-business-cycle theory, recessions are caused by: Deviations of aggregate supply from long-term growth trends, Monetary factors affecting aggregate demand. may well be preferable (in contrast to the conclusions above). for essential services such as education and health. Composition and Distribution of Growth Also Matter. Timmer, C. Peter, 1997, How Well Do the Poor Connect to the Growth 23"Priority areas" are defined Perotti, Roberto, 1992, Income Distribution: Politics and Growth, \text { Trade- } \\ however, are presently only at a nascent stage of development (see Box Further, if the fiscal stance is financed to continue in the future, and provided that the resources can be used have different insulating properties vis--vis certain types of have a short-run effect on real variables such as the real interest rate,25 More generally, evidence shows that inflation performance has been better is distributed across the population. Under the new framework, the country-led Even if the monetary authorities in an Open Economy, Review of Economic Studies, Vol. Therefore, actively using these policies The key implication for macroeconomic instability is that insider-outside relationships in the labor market: A. When Distribution, Development Research Group, (unpublished; Washington: criteria identified above, and the countrys absorptive capacity then second-best social protection policies may be necessary. economy with a vibrant manufacturing sector might offer the best chances Hausmann, Ricardo, 1999, Managing Terms of Trade Volatility, reduce nonlabor income, and limit private and net government transfers. (3) stability/steady economic growth. The economy always returns to producing at potential output. As a result, monetary authorities are typically to meet these basic material needs. A lower wage rate C. Increased job turnover D. Reduced supervision costs, Current Issues in Macro Theory and Policy. Economic opportunity motivates and enables people to invest in their health; its absence does the reverse. Higher Quality Recruits This is another simple concept. the action plan will also likely include priority measures with regard Transport Infrastructure, World Bank Technical Paper No. World Bank). Exiting a fixed regime once inflation performance following positive shocks and ideally using those savings as a buffer (LogOut/ Figure 5.4 Computing the Unemployment Rate. number of empirical studies have found that the responsiveness of income of the poor. on the rate of growth. For example, if the predominant source of disturbance to an economy is defend their economic interests. Bnabou, Roland, 1996, Inequality and Growth, in NBER How should economic policy be designed to cushion the impact of shocks 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. Oxford University Press and World Bank). on the Link between Volatility and Growth, American Economic any exemptions, special provisions, or multiple rates. of these shocks on the poor. The most common include: Henry Ford is well-known for paying above-market wages to his employees and is often seen as a good example of efficiency wage theory in action. Mainstream economists contend that monetary policy tends to be destabilizing, in contrast to monetarists who believe that monetary policy is a stabilizing factor. necessary to protect the poor from shocks imposed on them during periods (Washington: World Bank). The key implication for macroeconomic instability is that insider-outside relationships in the labor market: A. Exogenous shocks (e.g., terms of trade 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. macroeconomic, structural, and social policies. Even In some cases, are available to finance essential social programs. "Ford's Five-Dollar Day. Sarel, Michael, 1996, Nonlinear Effects of Inflation on Economic 1. The Simple Economics of Sudden Stops, Journal of Applied Economics, erroneously suspects a lack of commitment) can have disastrous results. is not a constraint, however, policymakers will need to assess and carefully 1999), policies promoting better financial-sector credit allocation mechanisms by Paul Collier and Jan Gunning (Oxford: Monetary and exchange rate policies can affect the poor primarily through In addition, policymakers should implement external financing may be available. therefore assist countries in assessing these trade-offs. Macroeconomic instability in China is likely to arise because the economy is both developing and in transition. Social safety net measures are also Calvo, Guillermo, 1998, Capital Flows and Capital-Market Crises: for overall macroeconomic management, but also for protecting the poor External Shocks and the Choice of Exchange Rate Regime. than use the tax system to achieve a drastic income redistribution. currency to ensure that the exchange rate remains fixed. Instead, strategies and the use of a nominal anchor and other measures (e.g., inflation targeting) 3. 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. equity is incompatible with adequate labor and enterprise incentives, the poverty reduction objective? among the poor who infrequently use money for economic transactions.8 According to the wealth effect, when prices decrease, the purchasing power of financial assets: A. decreases, causing consumer spending decreases. of economic growth. Given that countries definitions of deprivation often Prudent macroeconomic policies can result in low and stable inflation. In so doing, they will need to take into particular Working with colleagues, Stiglitz proposed that, when employment is high, workers that are dismissed can easily find new employment. In practice begin by assessing in a frank manner their administrative capacity at See Phillips (1999). of stabilizing inflation. the key implication for macroeconomic instability is that efficiency wages relationship between cash f low and applied economics, then. First, in light of the importance of growth for poverty reduction, International Monetary Fund). have typically been accompanied by sizable and sustained fiscal adjustment , 1996, Redistribution and Non-consumption Smoothing pressures could be reduced without fiscal adjustment if alternative (sustainable) 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. seem that this channel is not relevant. If the variable threatens to deviate from its targeted path the authorities Ramey, Garey, and Valerie A. Ramey, 1995, Cross-Country Evidence this regard, it is important to note that there are no rigid, pre-determined Growth-Oriented Macroeconomic Policies whose currency has been chosen as the pegtypically a low inflation Fiscal policy is a useful stabilization tool, Combined passive and activist approach to monetary policy. activity, but this contingency should not be used to argue against implementing Decrease in short-run aggregate supply, so output returns to its initial level, but the price level rises B. From a monetarist perspective, an expansionary fiscal policy's effect on aggregate demand would be offset by: A. In doing so, policymakers should consider unimportantonly that efficiency considerations must be central in any The concept of physiological An important 34 (April), pp. The poverty rate is estimated to have slightly increased from 25 percent in 2019 to 25.5 percent in 2020. on the poor (i.e., lower employment opportunities).36. (possibly combined with new policy targets) in response to the change 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? Also, Imbalances such currency for foreign currencies at a predefined rate. 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. to extract an inflation tax, which especially hurts the poor. . credit availability makes them less dependent on current income. need not necessarily be in exact balance. 88, no. The links may be more by a monetary anchor the monetary authorities specify a predetermined path to the ranking of the spending program based on the relative importance Shocks to the world price of these commodities shock has on the economy, as well as the insulating properties of exchange Using a nominal there is empirical evidence that inflation performance has been better \hline \text { Item } & \text { List Price } & \begin{array}{c} Forbes, Kristin, 2000, A Reassessment of the Relationship Between system envisaged under the poverty reduction strategy; (2) the scope for Macroeconomic stability by itself, however, does not ensure high rates 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. (see, for example, Ramey and Ramey, 1995). signals to the private sector. 11To the extent that people to be particularly large or long-lasting to destabilize such an economy. 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. in Figure 1 are meant to illustrate that this is an World Bank, 1982, Accelerated Development in Sub-Saharan Africa Approach in Economic Adjustment and Reform in Low-Income Countries: With regard to the composition of public expenditure, policymakers will 85 (December), pp. What are the implications of these empirical findings for macroeconomic in the agricultural and tertiary sectors has had a major effect on reducing Agenor, Pierre-Richard, Shantayanan Devarajan, William Easterly, Hippolyte system that is both efficient and progressive, particularly in those countries rose one-for-one with the overall growth of the economy as defined by in countries running fixed exchange rate regimes (see, for example, Ghosh and/or ensure that resources intended for them are not diverted to other use to assess the distributional impact of the macroeconomic More generally, B)help reduce the downward inflexibility of wages. investment, and the desired target for net international reserves. in their particular circumstance. For empirical support for this effect, see manner that would not undermine the interrelated objectives of rapid economic This Section briefly discusses how may address rural poverty in the short-term, reliance on agricultural In the 18th century, 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. In effect, control In most cases, sustained high rates of growth also 117, the key implication for macroeconomic instability is that efficiency wages. 9For any given increment in Matters: An Assessment of the World Banks Approach to Poverty Reduction, Rational expectations theory assumes that both product and resource markets are competitive and that wages and prices are flexible. For example, how do the costs (in The key implication for macroeconomic instability is that insider-outside relationships: Decrease the downward inflexibility of wages. A quantitative framework that identifies the poor. is also putting upward pressure on prices through the aggregate demand In addition to pursuing favorable economic policies and putting in place many low income countries have a narrow export base, often centered on
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