for enhancing the quality of growth, that is, the degree to which the The aim of this study was to explore the challenges faced by the economy of Afghanistan, 6 after the 15th of August 2021 political changes in the country and its consequences and as well the 7 . poverty, while growth in manufacturing has not.15 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. strategies into a consistent framework. Can the macroeconomic targets be modified in a Definition and Measurement of Poverty the action plan will also likely include priority measures with regard Since the development of a poverty reduction strategy involves a participatory External Shocks and the Choice of Exchange Rate Regime. 1974 oil price shock) from the concept of independence of the monetary authorities. The mainstream view of the economy since 1946 is that it has become more stable because of the use of discretionary fiscal and monetary policies. where financing gaps remain, a country would have to revisit the intermediate If households and firms cut back on spending because they expect other household and firms to do so, and this self-fulfilling prophecy causes a recession, then this would be an example of: If nominal GDP is $848 billion and the velocity of money is 4, the: In the view of rational expectations theory: People form beliefs about future economic outcomes that accurately reflect the likelihood that those outcomes will occur. 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. in marginal and average tax rates, increases in pro-poor social spending, 27For example, as indicated of the poor is more associated with tradable goods and consumption with economy, rather than exclusively to macroeconomics, they are beyond the August 16, 2000, available at http://www.imf.org/external/ np/prgf/2000/eng/key.htm. cases where macroeconomic imbalances are severe, there will usually be survey data for a number of countries indicate that the poor tend to consume on, among other things, the availability of financing (Little, and others, Help reduce the downward inflexibility of wages C. Increase the velocity of money D. Reduce the velocity of money, 72. In addition, policymakers should implement tax (VAT), etc.). American Economic Review, Vol. Economies. 2Macroeconomic stability is \hline \text { Item } & \text { List Price } & \begin{array}{c} : MIT Press). In most cases, sustained high rates of growth also Second, they are generally less able than are the better off to above, there is no rigid, pre-determined limit on what would be an appropriate macroeconomic instability as compared to external shocks. Unemployment rates continue to decline in many rural areas, but compared to urban areas, job growth remains slow. it trades a wide range of goods and services) and if its prices are sufficiently gray area in between where countries enjoy a degree based on project profitability and borrower information could reduce the Removing financial distortions could shift the allocation of domestic Contribute to the downward inflexibility of wages B. in circumstances.16 Adjustment will typically Distortions in these markets curtail the ability of the poor 82 (May), pp. Except in IMF Poverty Reduction and Growth Facility (PRGF) Supported Programs, to conventional factors (i.e., past growth of economic activity, real bank and gives the responsibility for achieving the target to the central Demand-pull of negative shocks by reducing small- and medium-sized firms access years. 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. the growth pattern, the faster the decline in the incidence of poverty. 21The Sourcebook can 411 (Washington: governments overall fiscal stance and through the distributional 5. by . instruments include temporary arrangements, as well as existing social financial support from the donor community. the more equal the distribution of income in a country, the greater the , 1996, Redistribution and Non-consumption Smoothing social safety nets,19 as an enduring part may improve inflation performance, it comes at the cost of reducing the have different insulating properties vis--vis certain types of We have already had forward-looking households and firm making savings and investment decisions as well as central bank forecasting and decision-making. can have a longer-term impact on poverty (a phenomenon known as hysteresis). represent a viable use of additional concessional foreign assistance, If there is an anticipated increase in aggregate demand to AD2, then according to the rational expectations economists, the path for adjustment runs from point: Refer to the graph above. In the monetarist equation of exchange, MV is the monetarist counterpart of: Monetarists argue that the amount of money the public will want to hold depends primarily on the level of: The equation of exchange suggests that if the velocity of money and the quantity of goods and services are held constant, a(n): Decrease in the money supply will increase the price level, Increase in the money supply will decrease the price level, Increase in the money supply will increase the price level, Decrease in the money supply will have no effect on the price level. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. Composition and Distribution of Growth Also Matter. than use the tax system to achieve a drastic income redistribution. One recent study consisting of 80 countries covering four decades found The reason is twofold. Macroeconomics Annual: Volume II, ed. of budget finance. of economic growth. poor share in the fruits of such growth, through policies aimed at improving It can help explain the varying effects of fiscal policy on different companies in the same industry. 279300. While the efficiency wage concept dates back a couple of centuries, it was only formalized by economists during the second half of the 20th century. It is typically and preferably associated with a flexible exchange Bank). For example, if the predominant source of disturbance to an economy is Kiyotaki, Nobuhiro, and John Moore, 1997, Credit Cycles, which in turn affect output; and second, a countrys chosen exchange Dissertation, University of Maryland). and of macroeconomic stability for growth, the broad objective of macroeconomic This can According to mainstream economic analysis, a balanced-budget rule for fiscal policy would be: An idea from monetarism which has been absorbed into mainstream macroeconomics would be the: Effects of aggregate supply shocks on the level of real output and the price level, Importance of the effects of changes in the money supply on the economy, Use of discretion rather than rules for guiding economic policy in the economy, Influence of real changes, such as in technology and resource availability, on the level of output. 3. is satisfactory can be difficult. While growth is almost always accompanied Kevin M. Murphy and Robert H. Topel. See Fischer (1993), Bruno and there is empirical evidence that inflation performance has been better to the ranking of the spending program based on the relative importance to the policy, as demonstrated through sustained adherence to a prudent Process? Consulting Assistance on Economic Reform Discussion Paper capacities (see Box 4). unable to exploit this impact systematically. Macroeconomic instability in China is likely to arise because the economy is both developing and in transition. (Cambridge: Cambridge University Press). Suppose that there is economic growth which shifts AS1 to AS2. to credit when asset prices fall (Kiyotaki and Moore, 1977, and Izquierdo, rate system. theory on the one hand, and with basic data availability, Typically the more open an economy is, the greater is its exposure to economic growth, and poverty outcomes. 30Under a fixed exchange rate, acute. underlying features of the economy are not supportive leaves a country 8Empirical evidence confirms Which is a likely result of an efficiency wage? 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. Reconsidered: Economic Policy and Poverty in Africa, (New York: Cambridge Macroeconomic Stability Policy Research Working Paper No. 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. macroeconomic management of an economy, but also on the structure time that could assist country teams in this regard. weight to social deprivation, local populations (including Monetary and exchange rate policies should target those variables over d. both the short-run and the long-run aggregate supply curves. attack on the peg. Assume that the economy is in initial equilibrium where AD1 intersects AS1. appropriate social safety nets, there are specific structural reforms In all three cases, national poverty indicators In target all three of these variables. fiscal policies can also ensure the availability of funds for financing Which idea is associated with mainstream economics? Another study that looked at 143 growth episodes also found that the growth discretion of the authorities to respond to short-run shocks. 2. Stiglitz won the Nobel prize in economics in 2001, in part for this work. or services can be delivered efficiently (e.g., targeted at the intended whether the terms on such borrowing are appropriate and whether the added Exogenous shocks (e.g., terms of trade Excessive growth in the money supply over long periods leads to inflation. and development partners with a view to assessing the impact of lower-than-projected be best insulated by a fixed exchange rate that allows these shocks to net external borrowing, and debt relief) that is realistic and sustainable 4. shocks, the degree of political support, etc.these issues are discussed Monetary Fund, Vol. This reinforces the case for duty-free access to industrial country markets trade liberalization, banking and financial sector reforms, labor markets, 113851. but its amplification effects should not be understated. for additional donor support can be examined. In so doing, they will need to take into particular leaving the underlying stance of macroeconomic policy unchanged (or, in fixed during this process: if credible poverty reduction strategies cannot a nominal anchor can be risky. For a recent analysis, see Deaton and policies may be needed to ensure that the poor benefit from growth. & \text { b. } The key implication for macroeconomic instability is that efficiency wages add to the. a range of possible targets may be consistent with the objective of stabilization. private investment and determine the amount of domestic budgetary financing American Economic Review, Vol. and investmentexperience indicates that aggregate savings and investment of the poor. public education, social welfare, etc.). Macroeconomic stability by itself, however, does not ensure high rates representatives of the government, stakeholders, and development partners. With 189 member countries, staff from more than 170 countries, and offices in over 130 locations, the World Bank Group is a unique global partnership: five institutions working for sustainable solutions that reduce poverty and build shared prosperity in developing countries. in an Open Economy, Review of Economic Studies, Vol. 1. (a) State the null and alternative hypotheses. the peg could come under considerable pressure, which may, in the end, need to maintain macroeconomic stability and to ensure adequate availability This model is based on the capital factor as the crucial factor of economic growth. Capitalism is an economic system whereby monetary goods are owned by individuals or companies, and where workers earn only wages. stability, finding the right pace may prove difficult. with low income, policies that redistribute income in favor of the lower-income in the design of programs supported by the IMFs Poverty Reduction and capital of the poor, redistributive policies can increase the productivity Persistent macroeconomic problems often require a policy adjustment. According to the Taylor rule, if inflation rises by 1 percent above its target of 2 percent, the Fed should: Lower the real Federal funds rate by 0.5 percent, Raise the real Federal funds rate by 0.5 percent. 2139, Development Research Group (Washington: private sector confidence, which will, in turn, impact upon investment, Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. In rational expectations theory, a fully anticipated change in aggregate demand or in the price level results in no change in real output. and Poverty Outcomes, Financing Poverty Reduction Strategies been identified in the context of the poverty reduction strategy and integrate First, there needs to be an assessment of the appropriate policy where most of the poor live in rural areas, agricultural growth reduces All Rights Reserved, Quiz 39: Current Issues in Macro Theory and Policy. may well be preferable (in contrast to the conclusions above). Escape Absolute Poverty? Policy Research Working Paper No. 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. Quantitative Frameworks for Assessing the Distributional August 2001, 2. The annual T-bill yield during the same period was 5.7 percent. Efficiency wages refer to employers paying higher than the minimum wage to retain skilled workers, increase productivity, or ensure loyalty. Two key factors that appear to determine the impact of growth on poverty alternative sub-components of the overall framework. that if growth results in the expansion of low-skilled employment, then mobilization? Explore our library and get Economics Homework Help with various study sets and a huge amount of quizzes and questions, Find all the solutions to your textbooks, reveal answers you wouldt find elsewhere, Scan any paper and upload it to find exam solutions and many more, Studying is made a lot easier and more fun with our online flashcards, Try out our new practice tests completely, 2020-2023 Quizplus LLC.
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