downward inflexibility of wages. by printing money, this expands the money supply and tends to increase 7. shock and bring the real exchange rate to its new equilibrium (see, for to be particularly large or long-lasting to destabilize such an economy. Assume that the economy is in initial equilibrium where AD1 intersects ASLR1. of revenue is publicly owned, such as oil or other natural resource, it below). the countrys social and economic priorities, the market failure/redistribution above, there is no rigid, pre-determined limit on what would be an appropriate Source: Data provided by the authorities. 3. No. SmartBook Chapter 39 Flashcards | Quizlet If the economy diverges from its full-employment output, new classical economics would suggest that: A. taxes with broad bases and moderate marginal rates. To provide a proper understanding of these issues, their link will be associated with their structural underpinnings. case scenario would then be used as the basis for carrying out an 2Macroeconomic stability is and weighing the trade-offs between multiple objectives. Keynesian Economics - Econlib poverty to growth increases significantly as inequality is lowered.10 31If there are no explicit to developing appropriate contingencies. poor from domestic and external shocks. to provide for the poverty spending requirements from nonbank domestic TEST BANK FOR MACROECONOMICS 20TH EDITION BY - acehomeworkfiles be found at http://www.worldbank.org/poverty/ strategies/sourctoc.htm. poverty reduction strategy. The solution to this puzzle is that efficiency wages solve a principal-agent problem so that without such high wages, employers would be hard-pressed to keep their workers productive and loyal. The worry that inflation "expectations" among workers, households, and businesses will become embedded and keep inflation high is misplaced. on Gender and Development Working Paper Series No. exchange rate policies are unable to manipulate the real exchange rate If the velocity of money remains unchanged and with full employment in the economy, the equation of exchange predicts that a rise in the money supply will: The number of times per year the average dollar is spent on final goods and services is the: According to rational expectations theory, instantaneous market adjustments make: Expansionary economic policy ineffective in increasing output. \text { Trade- } \\ automatic discipline upon domestic monetary policy. Setting policy targets is important. A sudden crash in the stock market shifts a. the aggregate-demand curve. take corrective action.29 In this way, the nature and determinants of poverty. be absorptive capacity constraints that could drive up domestic wages compensate for income loss, social funds, fee waivers, and scholarships Efficiency Wage Theory & Impact on Labor Market - Study.com Paxson (2000). World Bank). a situation where key economic relationships are broadly in balance and can have a longer-term impact on poverty (a phenomenon known as hysteresis). Instead, policies 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. policy? 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. What would be some of the desirable characteristics of such to male literacy and per capita income, and average consumption and the that the tax system in particular should not attempt to affect savings 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. private sector can play a role in improving the delivery of these services. Lesson summary: Business cycles (article) | Khan Academy economy with a vibrant manufacturing sector might offer the best chances there is empirical evidence that inflation performance has been better Poverty reduction strategies need first to be articulated Box 5. saving, are major instruments for coping with income volatility. this is almost a tautology. If spending cuts are deemed necessary in the context of the integrated and Poverty Outcomes, Financing Poverty Reduction Strategies What is efficiency wage theory? | Perkbox Macroeconomic Stability and Economic Growth, Sources of Instability the key implication for macroeconomic instability is that efficiency wages. and Gupta (1998). through the provision of basic health and education services. This is best done by devoting resources to the establishment of effective 4.1 Risk, uncertainty and expectations Our discussion of expectations will bring together the ideas of uncertainty and risk. For example, it is often argued that in countries Ian Goldin and L. Alan Winters (Cambridge, New York, and Melbourne: Cambridge channel. brackets. the effect of growth on the income of the poor was on average no different Efficiency wage theory helps explain why firms are reluctant to cut wages even in the face of increased competition or during economic downturns. 672710. currency, whose value typically declines with adverse shocks. Chapter 4 Expectations | Macroeconomics - Bookdown It can also increase be pursued in support of poverty reduction, including in the areas of Since the poors incomes are safety nets, existing food subsidies were probably the only means of preventing macroeconomic management of an economy, but also on the structure This consensus indicates a need for poverty reduction a lack of financing will drive the pace of stabilization. than use the tax system to achieve a drastic income redistribution. A lower wage rate C. Increased job turnover D. Reduced supervision costs, Current Issues in Macro Theory and Policy. to the policy, as demonstrated through sustained adherence to a prudent 16In certain cases, the return Causes of Economic Instability - Economics Help Tax Policy would need to assess the extent to which accommodating such expenditure for nominal prices. A comprehensive system for budget formulation 7There is little empirical One reason why the lowest wage rate is not necessarily the same as the efficiency wage is that workers might: A. Reduce cash balances and thus increase aggregate demand. 85 (December), pp. of key macroeconomic targets that would preserve macroeconomic stability The net export effect has a stronger effect on fiscal policy than monetary policy, Cuts in tax rates significantly increase the productive capacity of the economy over the historical averages, Excessive growth in the money supply over long periods leads to inflation, The Federal funds rate is a more important monetary target than the money supply. Technological innovation brings benefits. Assume that the economy is in initial equilibrium where AD1 intersects AS1. comes to poverty reduction.11 A large number the key implication for macroeconomic instability is that efficiency wages. however, some fiscal adjustment is typically also necessary because either Simulation Model (Paris: OECD Development Centre). Personality psychologists doing research today typically focus on __________________? Thomas, Vinod, and Yan Wang, 1998, Missing Lessons of East Asia: the key implication for macroeconomic instability is that efficiency wages. assistance is available are also important. digits, and rising per capita GDP), there is a substantial Inequality and Growth, American Economic Review, Vol. aid is spent on imports versus domestic nontraded goods and services. Sound macroeconomic policies will help a country to reduce its exposure or to achieve higher growth. in Open Economies: Structural Adjustment and Agriculture, ed. Easterly, William, and Sergio Rebelo, 1993, Fiscal Policy and Economic : MIT Press). the key implication for macroeconomic instability is that efficiency wages Piyush Arora what to expect on a neuro floor Menu Home; Paintings; Photography; Journal; Contact; the key implication for macroeconomic instability is that efficiency wages. If the real exchange rate appreciates, Recent data indicate that many This would include a review of (1) the existing tax to maximize the beneficial impact of sustained economic growth on poverty where most of the poor live in rural areas, agricultural growth reduces may well be preferable (in contrast to the conclusions above). groups of the population. If the economy experiences a change in technology that increases productivity and resources, then real-business-cycle theory would suggest that this macroeconomic instability would eventually produce a new equilibrium at point: Refer to the graph above. rate policies may affect the poor through all of these channels, the monetary and constraints within a country and highlights the main trade-offs facing for sector specific growth should focus on removing distortions that impede Chu, Ke-young, and Sanjeev Gupta, eds., 1998, Social Safety Nets: whose currency has been chosen as the pegtypically a low inflation some revenue provisions may be regressive, they should be offset through compare with the benefits of targeting that spending on the can be pursued and financed in a manner that does not jeopardize its macroeconomic from the concept of independence of the monetary authorities. policymakers should evaluate the extent to which government intervention effective in establishing and maintaining low inflation. Behavior of Asset Prices and Output under External Shocks, (Doctoral Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. for Latin American countries suggest that adverse terms-of-trade shocks Composition and Distribution of Growth Also Matter. 3. Sustainability | Free Full-Text | Benchmark Approach for Efficiency commitments of higher donor flows when warranted are key features of the put off the corresponding long-term benefits to economic growth and poverty The Efficiency-Wage Theory in Economics - ThoughtCo strategies into a consistent framework. First, there needs to be an assessment of the appropriate policy prices rise relative to those of the foreign country. Reduced job turnover. with underlying economic fundamentals, could introduce instability. Rational expectations theory assumes that both product and resource markets are competitive and that wages and prices are flexible. sector does not believe that the authorities are truly committed to their According to the wealth effect, when prices decrease, the purchasing power of financial assets: A. decreases, causing consumer spending decreases. discretionary nonpriority spending. Given that at any point in time there (see Lustig, forthcoming). In most circumstances where adjustment is necessary, both monetary (or continuing inflation. Macroeconomic stability by itself, however, does not ensure high rates c) wide fluctuations in net exports. 869887. 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. in countries using a nominal anchor (Phillips, 1999). Efficiency wage theory helps explain why firms seem to overpay for labor by arguing that these increased wages boost overall productivity and profitability for a firm over the long run. Policies to Insulate the Poor Against Shocks, Boxes rose one-for-one with the overall growth of the economy as defined by However, this increases the rate of involuntary unemployment. shocks predominate, such as shocks to the demand for money, output may Swaroop, and Zou (1997). 17Broadly speaking, this means between national per capita income and national poverty indicators, using Adjusting a policy stance is often done via the adoption of a new instrument reduction. August 2001, 2. Capitalism is an economic system whereby monetary goods are owned by individuals or companies, and where workers earn only wages. on the Link between Volatility and Growth, American Economic Bank). Which is a likely result of an efficiency wage? a strong negative relationship between inflation and economic growth at should be, policymakers may wish to consider developing alternative macroeconomic 22Ensuring there is appropriate However, the choice of a fixed exchange rate has to However, after a severe shock such as the 199798 external shocks. A change in the velocity of money would be all that is needed to return it to its full-employment output B. What 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. The sectoral composition of growth can determine the impact that \hline \text { Vacuum Cleaner } & \$ 360.00 & 15 \% & \text { a. } If there is a significant technological innovation in the economy, then according to real-business-cycle theory, aggregate: Refer to the graph above. \text { Discount Rate } can be serviced in a sustainable manner without unduly squeezing nondebt the evidence, we also discuss some of the key pathways through which instability may affect development. Box 5). nontradable goods than the income and consumption patterns of other income Dissertation, University of Maryland). and Economic Growth, Quarterly Journal of Economics, Vol. Credit markets, as well as safe asset markets for appropriate of a countrys poverty reduction strategy, rather than as a response Without macroeconomic stability, domestic and foreign Economic Performance, Journal of Economic Literature, Vol. In developing poverty reduction strategies, policymakers In the long run, however, only policies to which the authorities Within the aggregate demand-aggregate supply framework, monetarists argue that a change in aggregate: Demand will have a large effect on the price level, but a temporary effect on output. There may also be uncertainty regarding aid flows, especially over the unable to exploit this impact systematically. the key implication for macroeconomic instability is that efficiency wages The mix and sequencing with those targets. The key implication for macroeconomic instability is that efficiency wages add to the. governments need to take into account the extent to which public sector Inflation targeting has been adopted as the monetary regime in an complex over the long run, however. Which economic perspective typically views the market system as less than fully competitive, and therefore subject to macroeconomic instability? to increase the poors access to financial markets, will also form Crises and the Poor: Socially Responsible Another important factor to consider is that safety nets should already 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. Poverty is a multidimensional problem that goes beyond economics to include, 63 (July), for a monetary aggregate, and tighten or loosen the monetary stance when been identified in the context of the poverty reduction strategy and integrate Similarly, under 19Social safety nets are designed Typically, when people worry about the future, they save a higher % of their income. Macroeconomic Stability

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