1. Macroeconomics & The Global Economy -Term III Ace Institute of Management Session 11: Recent Macroeconomic Issues (Chapter 14 and 17) Instructor Sandeep Basnyat Sandeep_basnyat@yahoz.comSandeep_basnyat@yahoz.com Mobile: 9841 892281

2. 3 Recent Macroeconomic Issues  Stabilization policies  Stock Market and Tobin’s q  Residential Investment

3. 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.

4. 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.

5. 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

6. 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.

7. 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.

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

9. slide 9 Tobin’s 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 of q.  If MPK < cost of capital, then firms are incurring loses, so their stock market value falls, and q is low.

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

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

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

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

14. 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.

15. GOOD LUCK & a BIG Thank You 15