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Macroeconomics & The Global Economy

Ace Institute of Management

Session 14: Recent Macroeconomic Issues


Rijan Dhakal Mobile: 98510 69004

3 Recent Macroeconomic Issues  Stabilization policies  Stock Market and Tobin’s q  Residential Investment .

which means stability in general price level.e.Stabilization Policy  Economic Stabilization policies are the tools to ensure a stable economy i. attaining macroeconomic stability. . attaining a stable economic growth rate and high employment level among others  The major policy options that the government uses for macroeconomic stabilization are monetary and fiscal policies.

e. which can be done through contractionary fiscal policy or monetary policy. it is difficult to change the supply side (i. total output of the economy) in a short run and thus suitable option to reduce rate of inflation would be the reduction of aggregate demand. .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.

Stabilization Policy-Goals Price Stabilization   Monetary Policy: Decrease Money Supply Fiscal Policy: Decrease Aggregate Demand Monetary Policy: Increase Money Supply Fiscal Policy: Increase Aggregate Demand Growth Stabilization   .

Problems  Time Lag  There are two types of time lag  inside time lag: It is the period spend to identify if the problem has occurred.  Normally. This is the time between the shock to the economy and policy action responding to that shock. monetary policy has a shorter inside lag and a longer outside lag.  outside time lag: It is the time between policy action and its influence in the economy. Fiscal policy on the other hand has a longer inside lag and a shorter outside lag. .

a successful stabilization policy requires the ability to predict accurately If the economic prediction is inaccurate.Problems  Difficulty in Economic Forecasting  As policy influences the economy only after  a long time lag. . the policy implemented can distort the economy rather than solve the problem of imbalances.

Stock Market and Tobin’s Q  How do firms base their investment decision? .

Tobin’s q Market value of installed capital q  Replacement cost of installed capital  The stock market value of capital depends on the current & expected future profits of capital. slide 9 .  If MPK > cost of capital. then profit rate is high. then firms are incurring loses. so their stock market value falls. which drives up the stock market value of the firms. and q is low. which implies a high value of q.  If MPK < cost of capital.

PH /P. slide 10 .  PH /P is determined by supply and demand in the market for existing houses.Residential investment  The flow of new residential investment. IH . depends on the relative price of housing.

price of houses.How residential investment is determined (a) The market for housing PH P Supply Supply and demand for houses determines the equilib. The equilibrium price of houses then determines residential investment: Demand Stock of housing capital slide 11 KH .

How residential investment is determined (a) The market for housing (b) The supply of new housing PH P Supply PH P Supply Demand Stock of housing capital KH Flow of residential investment slide 12 IH .

How residential investment responds to a fall in interest rates (a) The market for housing (b) The supply of new housing PH P Supply PH P Supply Demand Stock of housing capital KH Flow of residential investment slide 13 IH .

GNP. Per Capita Income.For your own study Search and study some of the important macroeconomic indicators of Nepal: • GDP. • Recent monetary policies and its targets (interest rates/ exchange rate/ money supply etc.) • Budget and its targets • Some of the important macroeconomic problems of Nepal and your opinions for correcting them. Inflation and factors affecting it. .

GOOD LUCK &a BIG Thank You 15 .