macroeconomics

Division of economics concerned with the study of whole (aggregate) economies or systems, including such aspects as government income and expenditure, the balance of payments, fiscal policy, investment, inflation, and unemployment. It seeks to understand the influence of all relevant economic factors on each other and thus to quantify and predict aggregate national income.

Modern macroeconomics takes much of its inspiration from the work of Maynard Keynes, whose General Theory of Employment, Interest, and Money (1936) proposed that governments could prevent financial crises and unemployment by adjusting demand through control of credit and currency. Keynesian macroeconomics thus analyses aggregate supply and demand and holds that markets do not continuously ‘clear’ (quickly attain equilibrium between supply and demand) and may require intervention if objectives such as full employment are thought desirable. Keynesian macroeconomic formulations were generally accepted well into the post-war era and have been refined and extended by the neo-Keynesian school, which contends that in a recession the market will clear only very slowly and that full employment equilibrium may never return without significant demand management (by government). At the same time, however, neoclassical economics has experienced a resurgence, using tools from microeconomics to challenge the central Keynesian assumption that resources may be underemployed and that full employment equilibrium requires state intervention. Another important school is new classical economics, which seeks to show the futility of Keynesian demand-management policies and stresses instead the importance of supply-side economics, believing that the principal factor influencing growth of national output is the efficient allocation and use of labour and capital. A related school is that of the Chicago monetarists, led by Milton Friedman, who revived the old idea that an increase in money supply leads inevitably to an increase in prices rather than in output; however, whereas the new classical school contends that wage and price adjustment are almost instantaneous and so the level of employment at any time must be the natural rate, the Chicago monetarists are more gradualist, believing that such adjustment may take some years.