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Overview
The field of macroeconomics is a relatively recent development, even though sophisticated macroeconomic systems have been present in human civilizations from the beginning of time. The vast majority of economic research was done at the micro-level, examining the behavior of individuals, businesses, and industries until the 1930s.
Thoughts that stemmed from Scottish economist Adam Smith’s thesis of self-regulation in markets were the prevalent philosophy. In the absence of government involvement, market forces will ultimately remedy these issues; furthermore, government action in the free market will be useless at best and damaging at worst.
Keynesianism
In 1936, the British economist John Maynard Keynes published the General Theory of Employment, Interest, and Money. Macroeconomics was believed to be a distinct branch of economics.
According to the traditional perspective, as long as there are willing employees and industries ready to operate at full capacity, there will always be full employment.
The Great Depression of 1929, which resulted in massive layoffs across North America and Europe, put paid to this hypothesis. Other countries throughout the world felt the same impact.
During the Great Depression, many factories were shut down, resulting in a loss of employment for many employees. U.S. unemployment reached a peak of 25% in the years immediately after the Great Depression.
The development of macroeconomics as a distinct area of economics was sparked by Keynes’ attention to unemployment and depression and their effect on the economy. Looking economics assignment help in the Australia, So connect with us right now.
Theory
1935–36, British economist John Maynard Keynes wrote The General Theory of Employment, Interest, and Money, which created the theoretical groundwork for that transition. According to Keynes, governments might have averted the worst impacts of the Great Crisis.
If they had moved to fight the depression by increasing expenditure through fiscal policy. So the new era of macroeconomic philosophy was ushered in by Keynes.
Which he advocated for a more active role for government in the economy. To build on Keynes’ theories, economists like Paul Samuelson and Franco Modigliani, James Tobin and Robert Solow, among others, spawned the Keynesian school of economics.
The Keynesians, on the other hand, contended that governments have a responsibility to counteract recessions. When the economy is in a slump, there is little demand for anything, which causes the economy to suffer. Reduced sales lead to more job losses, which further reduces income and demand, thus prolonging the recessionary cycle. Because the government has power over taxes, it is able to increase expenditure on goods and services during times of economic distress, according to Keynesians.
Monetarism
The monetarists, led by famous University of Chicago economist Milton Friedman, initially confronted the Keynesian school of thought in the 1950s. Friedman provided an alternate theory to explain the Great Depression: the Federal Reserve System’s poor
Monetary policies converted what had began as a recession into a lengthy depression, according to Friedman (the central bank of the United States). Friedman’s theories evolved into monetarism over time. Instead of using fiscal policy to stimulate demand, monetarists advocated increasing the money supply in order to stave off recessions. According to monetarists, the government should refrain from interfering in free markets and the economy as a whole.
Developments that took place in the future
In the 1970s, the New Classical school of economic theory, founded by American economist Robert E. Lucas, Jr., posed a second challenge to the Keynesian school. Using Lucas’s key, the rational-expectations hypothesis was first put out. While prior Keynesian and monetarist models considered economic decision-makers as myopic and backward-looking.
Lucas claimed that rational decision-makers do not just rely on current and historical facts but also build expectations about the future based on a wide range of information available. Therefore, changes in monetary policy that are predictable will result in changes in nominal variables like prices and salaries, but will have no actual impact.
Pioneering work
Economists like Finn E. Kydland and Edward C. Prescott built rigorous macroeconomic models to explain business cycle variations after Lucas’ pioneering work.
These models became known as real-business-cycle (RBC) models in the macroeconomic literature. Lucas’ rational expectations theory informed RBC models, which built on a solid mathematical foundation. The RBC models were able to describe macroeconomic swings as the result of several external and internal shocks.
Which was a significant achievement (unpredictable events that hit the economy).
B. Taylor and Stanley Fischer, by modifying several fundamental underlying assumptions. Since prices and wages are able to adjust swiftly to changes in supply and demand, previous models have depended on this feature. Those economic variables become “sticky,” or resistant to change, as a result of this reality. Economic decision-makers may react to macroeconomic events by adjusting other variables since wages and prices tend to be sticky.
Macroeconomic models
Macroeconomic models developed by Taylor and Fischer were more accurate.
When they included market inefficiencies such as wage and price stickiness. There has been a lot of research on the influence of monetary policy on output and employment in the short term. in an environment where market imperfections such as stickiness are prevalent.
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