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Macroeconomics & The GlobalEconomyAce Institute of
Management
Session 14: Recent Macroeconomic Issues
Instructor
Rijan Dhakal
[email protected] Mobile: 98510 69004
mailto:[email protected]:[email protected]
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3 Recent Macroeconomic Issues
Stabilization policies
Stock Market and Tobins q
Residential Investment
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Stabilization Policy
Economic Stabilization policies are the toolsto ensure a stable
economy i.e. attainingmacroeconomic stability, which meansstability
in general price level, attaining a
stable economic growth rate and highemployment level among
others
The major policy options that the governmentuses for
macroeconomic stabilization are
monetary and fiscal policies.
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Stabilization Policy-Goals The long term goal of stabilization
policies is the
functioning of smooth and stable economy
The short term goal is to bring the imbalances in the
economy both internal and external into balance by
bringing the aggregate demand into better balance with
aggregate supply in an economy In such case, it is difficult to
change the supply side (i.e.
total output of the economy) in a short run and thussuitable
option to reduce rate of inflation would be thereduction of
aggregate demand, which can be donethrough contractionary fiscal
policy or monetary policy.
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Stabilization Policy-Goals
Price Stabilization Monetary Policy: Decrease Money Supply
Fiscal Policy: Decrease Aggregate Demand
Growth Stabilization
Monetary Policy: Increase Money Supply
Fiscal Policy: Increase Aggregate Demand
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Problems
Time Lag There are two types of time lag
inside time lag: It is the period spend toidentify if the
problem has occurred. This is thetime between the shock to the
economy and
policy action responding to that shock. outside time lag: It is
the time between policy
action and its influence in the economy.
Normally, monetary policy has a shorter insidelag and a longer
outside lag. Fiscal policy on
the other hand has a longer inside lag and ashorter outside
lag.
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Problems
Difficulty in Economic Forecasting
As policy influences the economy only aftera long time lag, a
successful stabilization
policy requires the ability to predictaccurately
If the economic prediction is inaccurate, thepolicy implemented
can distort the economyrather than solve the problem of
imbalances.
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Stock Market and Tobins Q
How do firms base their investment
decision?
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Tobins q
The stock market value of capital depends on the
current & expected future profits of capital.
If MPK > cost of capital,
then profit rate is high, which drives up the stock
market value of the firms, which implies a high
value ofq.
If MPK < cost of capital, then firms are incurring
loses, so their stock market value falls, and qis
low.
Market value of installed capitalReplacement cost of installed
capital
q
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Residential investment
The flow of new residential investment, IH,depends on the
relative price of housing,
PH/P.
PH/P is determined by supply and demand
in the market for existing houses.
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How residential investment is
determined
KH
Demand
(a) The market for housing
Supply and demand forhouses determines theequilib. price of
houses.
SupplyHP
P
Stock ofhousing capital
The equilibrium price ofhouses then determines
residential investment:
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How residential investment is
determined
KH
Demand
IH
Supply
(a) The market for housing (b) The supply of new housing
SupplyHP
P
Stock ofhousing capital
Flow of residentialinvestment
HP
P
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How residential investmentresponds to a fall in interest
rates
KH
Demand
IH
Supply
(a) The market for housing (b) The supply of new housing
SupplyHP
P
Stock ofhousing capital
Flow of residentialinvestment
HP
P
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For your own study
Search and study some of the importantmacroeconomic indicators
of Nepal:
GDP, GNP, Per Capita Income, Inflation and factors
affecting it.
Recent monetary policies and its targets (interestrates/
exchange rate/ money supply etc.)
Budget and its targets
Some of the important macroeconomic problems of
Nepal and your opinions for correcting them.
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GOOD LUCK
& a
BIG
Thank You
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