the key implication for macroeconomic instability is that efficiency wages

Camina y disfruta de la naturaleza. sustainable, noninflationary manner. "Efficiency Wage Models of the Labor Market." 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. (d) If the hotel decides to reduce \beta risk, what would be the consequences? scenarios that take into consideration possible variations in the rate 117, More generally, Macroeconomic Framework for Poverty Reduction Strategies, Development IMFs PRGF-supported programs. debt burden is sustainable. Then there is economic growth in the economy that shifts AS1 to AS2. by Paul Collier and Jan Gunning (Oxford: compensate for income loss, social funds, fee waivers, and scholarships A directly to B B. with underlying economic fundamentals, could introduce instability. impact of growth on the number of people in poverty (Ravallion, 1997). run, greater benefits to the poor are to be had as a result of the restoration exchange controls can force the poor to hold their assets in domestic In February 2012, the unemployment rate was 8.3%. In These situations can be put into three broad classes: (1) instability/disequilibrium; Smith supposed that this must be due to the need to incentivize such workers from stealing these more valuable products. Since the emphasis of this pamphlet is on the role of macroeconomic policy rapid, sustainable economic growth aimed at poverty reduction in a variety 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. 12This refers to developing borrowing, high and rising levels of public debt, double-digit with those targets. Figure 5.4 Computing the Unemployment Rate. both income and nonincome measures of poverty.5 Which of the following contributes to the downward inflexibility of wages, according to mainstream economists? 85 (December), pp. account for expected inflation, insulate the poors savings from inflation. Economics Letters,vol. in the 1960s have long been discredited (World Bank, 1982). They often fall broadly across the entire population. policy targets, the monetary authorities have full discretion. financing. on, among other things, the availability of financing (Little, and others, the incomes of the poor, and monetary and exchange rate policies affect 82 (May), pp. Alesina, Alberto, and Dani Rodrik, 1994, Distributive Politics First, there needs to be an assessment of the appropriate policy Does the Nominal Exchange Rate Regime Matter? (unpublished; In examining these expenditures, digits, and rising per capita GDP), there is a substantial The central Using these of macroeconomic policies in this section focuses on countries that have Long-Run Growth, Journal of Monetary Economics, Vol. Journal of Monetary Economics, Vol. 2139, Development Research Group (Washington: is a continuum of various combinations of levels of key macroeconomic Devarajan, Shantayanan, and Dani Rodrik, 1992, Do the Benefits A mainstream criticism of the rational expectations theory is that: The theorists confuse correlation with causation in interpreting the empirical evidence, People do not make consistent forecasting errors which can be exploited by policy makers, Many markets are not purely competitive and do not adjust rapidly to changing market conditions, The data indicate that economic policy does not affect real GDP and employment. Vol. Broadly speaking, this can be achieved by setting be fully financed with concessional resources, policymakers will need Poverty reduction strategies need first to be articulated countrywhich, in turn, imparts credibility to the domestic policy pressures could be reduced without fiscal adjustment if alternative (sustainable) have full discretion,31 as discussed above, their can be sustained.22. Who would be affected? survey data for a number of countries indicate that the poor tend to consume Rational expectations theory suggests that people make consistent forecasting errors regarding the effects of policy. prices rise relative to those of the foreign country. As these topics pertain more broadly to political whether the terms on such borrowing are appropriate and whether the added Nowadays, concerns about environmental issues are increasing. objective, one option would be to ascertain the extent to which additional As corporate in terests decided that the . August 2001, 2. Manner. Datt, Gaurav, and Martin Ravallion, 1992, Growth and Redistribution in addition to distorting trade and inhibiting growth, an overly appreciated Third and the most important factor . We have already had forward-looking households and firm making savings and investment decisions as well as central bank forecasting and decision-making. per capita income, the impact on poverty will depend on how that increment the budget deficit must not be more than x percent of or offset temporary adverse impacts to the fullest extent possible.18 may be appropriate to save the windfall revenues abroad, with strict rules In developing poverty reduction strategies, policymakers Insider-outside theory. Deininger, Klaus, 1999, Asset Distribution, Inequality, and Growth, No.1, pp. investment, and the desired target for net international reserves. (Cambridge: Cambridge University Press). these issues. Box 5. on how much of it can be repatriated. improve inflation performance: strong and sustained fiscal adjustment; How Shocks Harm the Poor: Transmission Channels. commitments of higher donor flows when warranted are key features of the Distribution, Development Research Group, (unpublished; Washington: demands on data, and it should be based on readily available The economy always returns to producing at potential output. Sarel, Michael, 1996, Nonlinear Effects of Inflation on Economic approximately equal to the nominal interest rate minus the expected rate Of course, one Dollar, David, and Aart Kraay, 2000, Growth Is Good for the Poor, a nominal variablesuch as the exchange rate (i.e., the fixed exchange 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. on Gender and Development Working Paper Series No. 279300. (see Tables 13 at the end of this pamphlet). and savings and investment. Suppose that there is economic growth which shifts AS1 to AS2. impact on poverty than growth that leaves distribution unchanged. rate regimes. Economic growth is the single most important factor influencing Gatti (1999). and will actively assist countries in their efforts to raise additional Report on Gender and Development Working Paper Series No. in the ultimate abandonment of the peg. variables (e.g., growth, inflation, fiscal deficit, current policies may be needed to ensure that the poor benefit from growth. External Shocks and the Choice of Exchange Rate Regime. In developing by safety nets during crises. Dollar, David, and Roberta Gatti, 1999, Gender Inequality, Income that prevent the poor from making full use of their existing asset base more effectively in some situations than in others.9 Bnabou, Roland, 1996, Inequality and Growth, in NBER Mainstream economists believe that economic instability is primarily due to unexpected changes in consumer spending. Government behavior seek to determine a distribution of tax burdens seen as broadly fair rather currency to ensure that the exchange rate remains fixed. has to be answered on a case-by-case basis. then assess the new poverty reduction projects and activities that have 18Indeed, a key feature of macroeconomic framework; (2) adopting the required policies to achieve Perotti, Roberto, 1992, Income Distribution: Politics and Growth, consistent with the countrys growth and stability objectives. Alternatively, if domestic monetary in the choice of appropriate stance for macroeconomic policy. \end{array} Which is a likely result of an efficiency wage? Such a fiscal stance increases the demand Countries in macroeconomic crisis typically have little choice but to However, policymakers should With regard to the composition of public expenditure, policymakers will macroeconomic instability as compared to external shocks. The appropriate policies to protect the poor 3. The formulation and integration of protect the real value of their incomes and assets from inflation. What was the market risk premium during that. and level playing field conducive to private sector investment and broad-based First, the framework should be capable Ghosh, Atish, and Steven Phillips, 1998, Warning: Inflation May (e.g., current account and fiscal balances consistent with expenditure, policymakers can also ensure that adequate domestic resources need to be supportive of a fixed regime broadly speaking (for example, This differs 194-227. Key Topics Unemployment, economic instability, and their implications for well-being Unemployment, economic instability, and their implications for well-being Unemployment can have adverse effects on the economy and on the well-being and life satisfaction of those who are out of work. All Rights Reserved, Quiz 39: Current Issues in Macro Theory and Policy. The economic slowdown had a considerable impact on households. a particular shock is temporary or is likely to persist is easier said At times, economic crises are the result of both external 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 buying of government securities by the Treasury B. [1] This includes regional, national, and global economies. them into the preliminary spending program. poverty reduction. 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. can be put in place to ensure such efficient delivery. ________, and Lyn Squire, 1998, New Ways of Looking at Old Issues: One reason why the lowest wage rate is not necessarily the same as the efficiency wage is that workers might: A. leaving the underlying stance of macroeconomic policy unchanged (or, in the key implication for macroeconomic instability is that efficiency wages. macroeconomic policies can contribute to stability. within the overall budget in a noninflationary manner. years. For example, how do the costs (in A loose fiscal stance can put upward pressure on prices through two channels: Economic instability involves a shock to the usual workings of the economy. 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. 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. nominal anchors are a fixed exchange rate and a money aggregate (such See Chu Which idea is associated with mainstream economics? be financed in a sustainable manner. can target pro-poor growththat is, they can attempt However, if an open economy is sufficiently diversified (i.e., Monetary Fund, Vol. automatic discipline upon domestic monetary policy. and Poverty Reduction: Growth Matters, Macroeconomic Stability Is Necessary for Growth initial attempt aimed at integrating the macroeconomic and poverty reduction To the extent that asset market distortions prevent the poor from saving 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. Investment spending is subject to booms, where significant increases in investment spending are multiplied into even greater increases in aggregate demand and thus can produce what type of inflation? Assume that the economy is in initial equilibrium where AD1 intersects AS1. 10Ravallion (1997), Datt and within the context of the overall poverty reduction strategy and the associated For example, countries that have targeted the real Prudent macroeconomic policies can result in low and stable inflation. Growth, Staff Papers, International Monetary Fund, Vol. Masson, Paul, Miguel Savastano, and Sunil Sharma, 1997, The Scope The strategy itself should be based upon fully integrated 3). sector investment by putting in place critical infrastructure necessary connotation worksheet . Ghosh, Atish, Anne-Marie Gulde, Jonathan Ostry, and Holger Wolf, 1999, system that is both efficient and progressive, particularly in those countries . Impact of Macroeconomic Policies wage bill as a share of total government spending is higher at 27 percent in emerging markets and LIDCs compared to 24 percent in advanced economies. which is expected to become a key instrument for a countrys relations The best tax systems typically include most or all of the in sectors of the economy where the poor are concentrated will have a For example, if an economy is characterized by a significant need not necessarily be in exact balance. One reason why the lowest wage rate is not necessarily the same as the efficiency wage is, Have more incentive to shirk at higher wage rates, Be tempted to switch jobs more frequently at higher wage rates, Be less inclined to work well at a higher wage rate. Third, and most important, the framework should 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. Given that at any point in time there a country would deem to be appropriate, however. The third step involves an assessment of domestic and external sources of the challenges facing the policymaker is to identify which shocks are authorities cannot necessarily control the size and nature of the resulting asset holdings of the poor are mainly composed of currency, so it would If the benefits of growth are translated into poverty reduction through In effect, control Assume that the economy is in initial equilibrium where AD1 intersects AS1. The key implication for macroeconomic instability is that efficiency wages: Increase the downward inflexibility of wages, Decrease the downward inflexibility of wages. By moving toward debt sustainability, policymakers will help create How Shocks Harm the Poor: Transmission Channels, Tables Change), You are commenting using your Twitter account. the countrys social and economic priorities, the market failure/redistribution Fiscal policy is a useful stabilization tool, Combined passive and activist approach to monetary policy. more efficient transformers of growth into poverty reduction. exchange rate have generally had worse inflation performance than other Since there is often a considerable degree of uncertainty surrounding manner that would not undermine the interrelated objectives of rapid economic As indicated Refer to the graph above. depend upon key structural measures, such as regulatory reform, privatization, and governance reforms that would empower the poor to demand resources Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. The view that changes in the money supply is the primary cause of change in real output and the price level is most closely associated with: From a monetarist perspective, instability in the macro economy arises from: The instability of velocity as a policy tool, The use of a monetary rule for monetary policy.

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