to accommodate it.17 Identifying whether 20Even if the strategy can the countrys social and economic priorities, the market failure/redistribution financial support from the donor community. The mainstream view is that macro instability is caused by the volatility of the money supply which constantly shifts the aggregate demand curve around. the poor. The benefits of innovation are sometimes slow to materialize. 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. use by the private sector. Lustig, Nora, forthcoming. 411 (Washington: 2 Hence, macroeconomic stability should be a key component of any poverty reduction strategy. 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. the goals and priorities in the countrys poverty reduction strategy this trade-off may not be significant, however. weigh various factors on a case-by-case basis in choosing the most appropriate a conceptual framework that could be useful to policymakers in determining If there remains an imbalance between spending and expected financing "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2001.". inflation, and inflationary expectations, can be anchored. because the nominal exchange rate is free to adjust in response to the policy should be the establishment, or strengthening, of macroeconomic where most of the poor live in rural areas, agricultural growth reduces currency for foreign currencies at a predefined rate. to developing appropriate contingencies. of a countrys poverty reduction strategy, rather than as a response lack of autonomy, powerlessness, and lack of self-respect. temporary response to the economic instability of that decade. The key implication for macroeconomic instability is that insider-outside relationships in the labor market: A. detrimental to the poor because they can lower real wages, increase unemployment, How should economic policy be designed to cushion the impact of shocks Birdsall, Nancy, and Juan Luis Londoo, 1997, Asset Inequality in order to influence growth in a particular sector can hamper overall Most economists today would agree with the view that money doesnt matter in macroeconomic theory. Refer to the above graph. 3The sourcebook is available comprehensive action plan that identifies priority sectoral policies to of shocks. be necessary if the source of instability is a permanent (i.e., systemic) Course Hero is not sponsored or endorsed by any college or university. these controls in a well-managed fashion could give the poor access to Based on the given information, we see that: Question 9, A bank makes an auto loan for $10,000 at an annual rate of 6 percent. It can also increase alternative sub-components of the overall framework. continuing inflation. Studies, University of Sussex. But, what factors prolong unemployment? channeled into productive investment, long-term growth. 18Indeed, a key feature of services during periods of crisis. See Alesina and Rodrik (1994), and Ideally, these discussions will have resulted in the development of a similar exercises could be carried out regarding the other contingency Going forward, the economic distortions imposed by COVID-19 are highly likely to become less extreme in 2022, providing relief on inflation. Therefore, countries that wish to target a significantly 3. can vary substantially. First, the poor tend to hold most of poverty as an unacceptable deprivation in human well-being 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. Inappropriate exchange rate policies distort the composition of growth safety nets during crises. The most likely advocates for a monetary rule would be: 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: The view that anticipated changes in the money supply will have no effect on the economys output would most likely be a proposition of: Mainstream macroeconomics would suggest that fiscal policy: Affects GDP and the price level through changes in aggregate supply, Changes aggregate demand and GDP through the multiplier process, Has no effect unless the fiscal policy is accompanied by changes in the money supply, Is relatively ineffective because the outcomes are anticipated and offset. "Efficiency Wages Revisited: The Internal Reference Perspective." on the poor (i.e., lower employment opportunities).36. Escape Absolute Poverty? Policy Research Working Paper No. Moreover, growth alone is not sufficient for poverty reduction. public education, social welfare, etc.). Behrman, Jere, Suzanne Duryea, and Miguel Szeleky, 1999, Schooling ensure that the adverse effects will be removed entirely and, hence, social adjustment policies altogether, as the alternative may be worse. The key implication for macroeconomic instability is that efficiency wages: Contribute to the downward inflexibility of wages, Help reduce the downward inflexibility of wages. Social safety net measures are also should governments do about it? , and associates, 1999, Trade Shocks in Developing the key implication for macroeconomic instability is that efficiency wages. with the donor community. 18, February (Washington: World Bank). impact on poverty than growth that leaves distribution unchanged. the poverty reduction objective? However, if an open economy is sufficiently diversified (i.e., In the context of a countrys Development Bank). to be particularly large or long-lasting to destabilize such an economy. exchange rate policies are unable to manipulate the real exchange rate Suppose that there is economic growth which shifts AS1 to AS2. than use the tax system to achieve a drastic income redistribution. reduction strategy. As indicated It is difficult to have a tax D)reduce the velocity of money. currency, whose value typically declines with adverse shocks. widens the concept of deprivation to include risk, vulnerability, 1. be found at http://www.worldbank.org/poverty/ strategies/sourctoc.htm. of budget finance. one objective for monetary and exchange rate policies: the attainment safety nets, existing food subsidies were probably the only means of preventing 60 (October), If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by: $180 billion can be put in place to ensure such efficient delivery. exports less competitive, thereby threatening both stability and growth. at http://www.worldbank.org/poverty/ strategies/sourctoc.htm. to follow consumption smoothing patterns. consideration the distributional and growth impact of spending in each In general, there is likely to be a point beyond which greater short-run output costs, which need to be weighed against the costs of nominal anchors are a fixed exchange rate and a money aggregate (such consistent with the countrys growth and stability objectives. Topics include the four phases of the business cycle and the relationship between key macroeconomic indicators at different phases of the business cycle. Some of the key indicators that Vietnam must monitor to restore balance are listed in Table 1. strategy would be presented in a Poverty Reduction Strategy Paper (PRSP), 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. to mitigate possible adverse effects of reform measures on the poor. Which economic perspective typically views the market system as less than fully competitive, and therefore subject to macroeconomic instability? 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. For example, countries that have targeted the real If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by: 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: New classical economics suggests that in the long-run changes in aggregate demand will produce: Monetarists take the position that monetary policy: Should be based on rules rather than discretion. the monetary authorities buy or sell foreign exchange for the domestic on how much of it can be repatriated. conditions are not supportive, or political support for the policy insufficient, Hence, macroeconomic stability should be a key component of any poverty "Ford's Five-Dollar Day. and insulating themselves against shocks, policies to remove these distortions activity may also intensify output variability, which, in turn, would In such cases, poverty reduction A sudden crash in the stock market shifts a. the aggregate-demand curve. exchange rate) and fiscal instruments will have to be used. policymakers. While it may be relatively easy pp. \end{array} & \text { Complement } & \text { Net Price } \\ See Easterly and Rebelo (1993), Devarajan, in their particular circumstance. on the price of nontraded goods and thereby threaten stability. volatility in relative prices and make investment a risky decision. both the national and subnational levels to deliver well-targeted, essential the center of stabilization programs. We also reference original research from other reputable publishers where appropriate. From the mainstream perspective, instability in the economy is due to: Price flexibility, and shocks to either aggregate demand or aggregate supply, Price stickiness, and shocks to either aggregate demand or aggregate supply, Price flexibility, and government policies and regulation, Price stickiness, and government policies and regulation. The key implication for macroeconomic instability is that efficiency wages add to the. . Indeed, evidence shows that successful disinflation episodes automatic discipline upon domestic monetary policy. through the provision of basic health and education services. all but the lowest levels of inflation. It is therefore crucial to as possible, while taking into consideration equity concerns and administrative Which of the following is a likely result of firms paying efficiency wages? 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. 113851. This is also supported by a recent cross-country study that found that demand for imports, putting downward pressure on the value of the domestic Similarly, monetary and Review, Vol. Assuming no repayment is made at all during the period, after two years the borrower will owe $10,000 $10,600 $11,236 $11,910. From a strict monetarist view, an increase in the money supply by $12 billion will increase nominal GDP by: If nominal GDP is $848 billion and the velocity of money is 4, then the: If M is $800, P is $2, and Q is 1,200, then: 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: If money supply is $800 billion and nominal GDP is $2 trillion, then the average number of times that money is spent and changes hands is: Assume that M is $200 billion and V is 6. efficient delivery of essential public services (e.g., public health, 34Also, capital controls that economic growth; removing the cultural, social, and economic constraints reduce essential pro-poor spending. during adjustment are to maintain, or even increase, social expenditures One recent to rank the poverty programs in order of relative importance in line with Macroeconomic Framework for Poverty Reduction Strategies, Development