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Macroeconomics & The Global
Economy -Term III
Ace Institute of Management
Session 11: Recent Macroeconomic Issues
(Chapter 14 and 17)
Instructor
Sandeep Basnyat
[email protected]
Mobile: 9841 892281
3 Recent Macroeconomic Issues
 Stabilization policies
 Stock Market and Tobin’s q
 Residential Investment
Stabilization Policy
 Economic Stabilization policies are the tools
to ensure a stable economy i.e. attaining
macroeconomic stability, which means
stability in general price level, 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.
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 thus
suitable option to reduce rate of inflation would be the
reduction of aggregate demand, which can be done
through contractionary fiscal policy or monetary policy.
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
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. This is the
time 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 inside
lag and a longer outside lag. Fiscal policy on
the other hand has a longer inside lag and a
shorter outside lag.
Problems
 Difficulty in Economic Forecasting
 As policy influences the economy only after

a long time lag, a successful stabilization
policy requires the ability to predict
accurately
If the economic prediction is inaccurate, 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.
 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 of q.
 If MPK < cost of capital, then firms are incurring
loses, so their stock market value falls, and q is
low.
slide 9
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.
slide 10
How residential investment is
determined
(a) The market for housing
PH
P
Supply
Supply and demand for
houses determines the
equilib. price of houses.
Demand
The equilibrium price of
houses then determines
residential investment:
KH
Stock of
housing capital
slide 11
How residential investment is
determined
(a) The market for housing
PH
P
(b) The supply of new housing
PH
P
Supply
Supply
Demand
KH
Stock of
housing capital
IH
Flow of residential
investment
slide 12
How residential investment
responds to a fall in interest rates
(a) The market for housing
PH
P
(b) The supply of new housing
PH
P
Supply
Supply
Demand
KH
Stock of
housing capital
IH
Flow of residential
investment
slide 13
For your own study
• Take notes some of the important macroeconomic
indicators of Nepal:
• GDP, GNP, Per Capital Income, Inflation and factors
affecting it.
• 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.
• Etc. etc. etc.
GOOD LUCK
&a
BIG
Thank You
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