See
also: List of Economic Topics 
MACROECONOMICS
Macroeconomics
is the study of the entire economy in terms of the total amount of goods and services
produced, total income earned, the level of employment of productive resources,
and the general behavior of prices. Macroeconomics can be used to analyse how
best to influence policy goals such as economic growth, price stability, full
employment and the attainment of a sustainable balance of payments.
Origins
of Macroeconomic thought
Until
the 1930s most economic analysis concentrated on individual firms and industries.
With the Great Depression of the 1930s, however, and the development of the concept
of national income and product statistics, the field of macroeconomics began to
expand. Particularly influential were the ideas of John Maynard Keynes, who used
the concept of aggregate demand to explain fluctuations in output and unemployment.
Keynesian economics is based on his ideas.
One
of the challenges of economics has been a struggle to reconcile macroeconomic
and microeconomic models. Starting in the 1950s, macroeconomists developed micro-based
models of macroeconomic behavior (such as the consumption function). Dutch economist
Jan Tinbergen developed the first comprehensive national macroeconomic model,
which he first built for the Netherlands and later applied to the United States
and the United Kingdom after World War II. The first global macroecomomic model,
Wharton Econometric Forecasting Associates LINK project, was initiated by Lawrence
Klein and was mentioned in his citation for the Bank of Sweden Prize in Economic
Sciences in Memory of Alfred Nobel in 1980.
Theorists
such as Robert Lucas Jr suggested (in the 1970s) that at least some traditional
Keynesian macroeconomic models were questionable as they were not derived from
assumptions about individual behavior. However, New Keynesian macroeconomics has
generally presented microeconomic models to shore up their macroeconomic theorizing,
while the Lucas critique has fallen from favor.
In
2004, the Norwegian Finn E. Kydland and the American Edward C. Prescott, were
awarded the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel
for their work in this area.
Today
the main schools of macroeconomic thought are as follows:
Keynesian
economics, which focuses on aggregate demand to explain levels of unemployment
and the business cycle. That is, business cycle fluctuations should be reduced
through fiscal policy (the government spends more or less depending on the situation)
and monetary policy. Early Keynesian macroeconomics was "activist,"
calling for regular use of policy to stabilize the capitalist economy, while some
Keynesians called for the use of incomes policies.
Monetarism,
led by Milton Friedman, which holds that inflation is always and everywhere a
monetary phenomenon. It rejects fiscal policy because it leads to "crowding
out" of the private sector. Further, it does not wish to combat inflation
or deflation by means of active demand management as in Keynesian economics, but
by means of monetary policy rules, such as keeping the rate of growth of the money
supply constant over time.
Post-Keynesian
economics represents a dissent from mainstream Keynesian economics, emphasizing
the role of uncertainty and the historical process in macroeconomics.
New
classical economics, which explores the implications of rational expectations.
Their original theoretical impetus was the charge that Keynesian economics lacks
microeconomic foundations -- i.e. its assertions are not founded in basic economic
theory. This school emerged during the 1970s. This school asserts that does not
make sense to claim that the economy at any time might be "out-of-equilibrium".
Fluctuations in aggregate variables follow from the individuals in the society
continuously re-optimize as new information of the state of the world is revealed.
New Keynesian economics, which developed partly in response to new classical
economics. It strives to provide microeconomic foundations to Keynesian economics
by showing how imperfect markets can justify demand management.
Supply-side
economics, which delineates quite clearly the roles of monetary policy and
fiscal policy. The focus for monetary policy should be purely on the price of
money as determined by the supply of money and the demand for money. It advocates
a monetary policy that directly targets the value of money and does not target
interest rates at all. Typically the value of money is measured by reference to
gold or some other reference. The focus of fiscal policy is to raise revenue for
worthy government investments with a clear recognition of the impact that taxation
has on domestic trade.
Austrian
macroeconomics presents another laissez-faire school of macroeconomics. It
focuses on the business cycle that arises from government or central-bank interference
that leads to deviations from the natural rate of interest.
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