Macroeconomics

Elements of earlier work from the likes of Adam Smith and John Stuart Mill clearly addressed issues that would now be recognized as the domain of macroeconomics. Macroeconomics, as it is in its modern form, is often defined as starting with John Maynard Keynes and the publication of his book The General Theory of Employment, Interest, and Money in Keynes offered an explanation for the fallout from the Great Depression , when goods remained unsold and workers unemployed.

Keynes's theory attempted to explain why markets may not clear. Prior to the popularization of Keynes' theories, economists did not generally differentiate between micro- and macroeconomics. The same microeconomic laws of supply and demand that operate in individual goods markets were understood to interact between individuals markets to bring the economy into a general equilibrium , as described by Leon Walras.

The link between goods markets and large-scale financial variables such as price levels and interest rates was explained through the unique role that money plays in the economy as a medium of exchange by economists such as Knut Wicksell, Irving Fisher, and Ludwig von Mises. Throughout the 20th century, Keynesian economics, as Keynes' theories became known, diverged into several other schools of thought. The field of macroeconomics is organized into many different schools of thought, with differing views on how the markets and their participants operate.

Classical economists held that prices, wages, and rates are flexible and markets tend to clear unless prevented from doing so by government policy, building on Adam Smith's original theories. Keynesian economics was largely founded on the basis of the works of John Maynard Keynes, and was the beginning of macroeconomics as a separate area of study from microeconomics. Keynesians focus on aggregate demand as the principal factor in issues like unemployment and the business cycle.

Keynesian economists believe that the business cycle can be managed by active government intervention through fiscal policy spending more in recessions to stimulate demand and monetary policy stimulating demand with lower rates.

Keynesian economists also believe that there are certain rigidities in the system, particularly sticky prices that prevent the proper clearing of supply and demand. The Monetarist school is a branch of Keynesian economics largely credited to the works of Milton Friedman. Working within and extending Keynesian models, Monetarists argue that monetary policy is generally a more effective and more desirable policy tool to manage aggregate demand than fiscal policy.

Monetarists also acknowledge limits to monetary policy that make fine tuning the economy ill advised and instead tend to prefer adherence to policy rules that promote stable rates of inflation. The New Classical school, along with the New Keynesians, is built largely on the goal of integrating microeconomic foundations into macroeconomics in order to resolve the glaring theoretical contradictions between the two subjects.

The New Classical school emphasizes the importance of microeconomics and models based on that behavior. New Classical economists assume that all agents try to maximize their utility and have rational expectations , which they incorporate into macroeconomic models. New Classical economists believe that unemployment is largely voluntary and that discretionary fiscal policy is destabilizing, while inflation can be controlled with monetary policy.

The New Keynesian school also attempts to add microeconomic foundations to traditional Keynesian economic theories. While New Keynesians do accept that households and firms operate on the basis of rational expectations, they still maintain that there are a variety of market failures, including sticky prices and wages.

Because of this "stickiness", the government can improve macroeconomic conditions through fiscal and monetary policy. The Austrian Schoo l is an older school of economics that is seeing some resurgence in popularity.

Austrian economic theories mostly apply to microeconomic phenomena, but because they, like the so-called classical economists never strictly separated micro- and macroeconomics, Austrian theories also have important implications for what are otherwise considered macroeconomic subjects.

In particular the Austrian business cycle theory explains broadly synchronized macroeconomic swings in economic activity across markets as a result of monetary policy and the role that money and banking play in linking microeconomic markets to each other and across time.

Macroeconomics differs from microeconomics , which focuses on smaller factors that affect choices made by individuals and companies. Factors studied in both microeconomics and macroeconomics typically have an influence on one another. For example, the unemployment level in the economy as a whole has an effect on the supply of workers from which a company can hire. A key distinction between micro- and macroeconomics is that macroeconomic aggregates can sometimes behave in ways that are very different or even the opposite of the way that analogous microeconomic variables do.

For example, Keynes referenced the so-called Paradox of Thrift, which argues that while for an individual, saving money may be the key building wealth, when everyone tries to increase their savings at once it can contribute to a slowdown in the economy and less wealth in the aggregate. Meanwhile, microeconomics looks at economic tendencies, or what can happen when individuals make certain choices.

Individuals are typically classified into subgroups, such as buyers, sellers , and business owners. These actors interact with each other according to the laws of supply and demand for resources, using money and interest rates as pricing mechanisms for coordination. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile.

Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Inflation : Economic indicators and the business cycle Costs of Inflation : Economic indicators and the business cycle Real vs.

National income and price determination. Aggregate demand : National income and price determination Multipliers : National income and price determination Short-run aggregate supply : National income and price determination Long-run aggregate supply : National income and price determination.

Equilibrium in the AD-AS Model : National income and price determination Changes in the AD-AS model in the short run : National income and price determination Long run self-adjustment : National income and price determination Fiscal policy : National income and price determination Automatic stabilizers : National income and price determination.

Financial sector. Financial assets : Financial sector Nominal v. The money market : Financial sector Monetary policy : Financial sector The market for loanable funds : Financial sector Interest rates and the time value of money : Financial sector.

Long-run consequences of stabilization policies. Please enable JavaScript if it is disabled in your browser or access the information through the links provided below. Have a question? Ask Us. Last Update: October 19,