Moldule 1 Flashcards
What is the primary objective of the macroeconomics course?
To position macroeconomics as a framework for policy analysis and understand the issues faced by Less Developed Countries (LDCs)
Define ‘aggregate’ in the context of macroeconomics.
A collection of specific economic units treated as if they were one unit
What major economic measures does macroeconomics focus on?
- Total output
- Total unemployment
- Total income
- Aggregate expenditures
- General price level
List the components of the economic methodological process.
- Observation of fact
- Formulation of a hypothesis
- Testing the hypothesis
- Acceptance, rejection, or modification of the hypothesis
- Continued testing against facts
What is the purpose of economic policies?
To resolve specific economic problems or further an economic goal
What are the steps in economic policy formulation?
- State the desired goal clearly
- Determine policy options
- Implement the policies
- Evaluate the policy options
Identify some economic goals for developing economies.
- Economic growth
- Full employment
- Price stability
- Equitable distribution of income
- Balance of payments
- Economic security
- Economic efficiency
- Economic freedom
What are the qualitative factors distingushing LDCs?
- maturity of political institutions
- perceived credibility of finaincial and political institutions
- efficiency of fiscal and monetary policy
- extent of tax evasion
What do economic indicators signal?
Whether we are getting closer to our desired targets
Differentiate between inside lag and outside lag in policy.
- Inside lag: time taken to undertake a policy action
- Outside lag: timing of the effects of the policy action on the economy
What are some empirically quantifiable issues distinguishing LDCs from developed countries?
- Per capita incomes
- Degree of monetization
- Type of exchange rate regime
- Structure of the economy
- Skill composition of the labor force
- Existence and efficiency of unemployment insurance and welfare programs
- Representation in int’l financial institutions
What are IMF conditionalities for loans to LDCs?
- Devaluation of currencies
- Reduction of imports
- Reduction of indirect taxes
- Reduction of government expenditure
What is the role of instruments in economic policy?
Tools that policy makers manipulate directly
What is a major condition for IMF loans to LDCs?
Devaluation of their currencies
This is intended to reduce imports.
What is the rationale behind IMF recommendations for LDCs?
Rooted in the monetary approach to balance of payments
This theory analyzes balance of payments problems of more developed economies.
What is the expected outcome of devaluation for LDCs?
Reduction in aggregate credit and inflationary pressures
It is believed that devaluation will improve aggregate supply and increase exports.
What was the immediate impact of IMF conditions on LDC populations?
Hardship, as social programs and employment were sharply curtailed
Stagflation -high unemployment and high inflation
This was due to lower ceilings on government expenditure.
What are the five actors/agents in the macroeconomic framework?
- Domestic firms
- Domestic households
- Domestic government
- Financial institutions
- Rest of the world (ROW)
What does ‘national product’ measure?
Sum of value added during an interval of time at various stages of production
This is also referred to as gross domestic product (GDP).
How is ‘national income’ defined?
Sum of all factor incomes generated during an interval of time
It includes wages, salaries, and remuneration for productive economic activity.
What constitutes ‘national expenditure’?
Consumption, investment, and government expenditure, plus exports minus imports
It can be examined separately for detailed analysis.
What is the formula for aggregate demand in an economy?
Y = C + I + G + X - M
Where Y is national income, C is consumption, I is investment, G is government expenditure, X is exports, and M is imports.
What does ‘NAFA’ stand for?
Net acquisition of foreign assets
It can be represented as NAFA = X - M = Y - A.
What is the purpose of the multiplier in macroeconomic analysis?
To evaluate quantitatively the increase in an endogenous variable following a unit increase in an exogenous variable
This helps in understanding the impact of changes in components of aggregate expenditure.
What is the equilibrium condition for national expenditure and income?
E = Y
Where E is total desired aggregate expenditure and Y is national income.
What is the investment multiplier?
The change in equilibrium national income consequent upon a change in investment
It reflects the impact of investment on overall economic activity.
Classsification of policy instruments
A. Public Finance: -balances -public expenses -fiscal revenue
B. Money Credit: -new lending and borrowing -interest rate -govt operations on current debt -credit creation by banks
C. Exchange rate: -control of immigration & trade exchange rate
D. Direct controls: -price control -other controls
What are the subdivisions of inside lag?
- Recognition lag: the dealy between the disturbance occurs and when the need for plocy is recognised.
- Decision lag: the time between the need for action is recognized and the policy action.
- Action Lag: the time between policy decison and implementation
Why did the developed countries adapt better to the crude oil price shock than LDCs?
- OPEC kept most of its revenue from crude oil exportd in the banks of developing countries
- they produced exportable goods that OPEC needed so they increased the price to compensate for the sharp detoriation in TOT
- they had the technological capability to develop feul efficient processes
On the other hand the LDCs faced BOP difficulties, their export prices could not be increased & had limited technological capabilites.
