Macroeconomics: The Great Depression and Keynesian School

Macroeconomics

• Macroeconomics emerged as a branch of economics in the 1930s.
• Before the 1930s, classical economists believed the economy would automatically reach full employment equilibrium through market mechanisms.

The Great Depression

• The Great Depression of the 1930s was characterized by low demand for goods and services, falling prices, business closures, and massive unemployment.

Keynesian School

• John Maynard Keynes' "General Theory of Employment, Interest and Money" (1936) laid the foundation for modern macroeconomics.
• Keynesians believe unemployment is the norm, not the exception, due to inflexible prices such as wages and interest rates.
• Aggregate demand is seen as the primary determinant of unemployment and output.
• Recessions are caused by a deficiency in aggregate demand.
• Increasing aggregate demand through government spending can bring an economy out of recession.
• Money is not neutral in the short run due to unemployment.

Monetarist School

• The monetarist school is based on Milton Friedman's contributions in the 1970s.
• Monetarists believe the money supply is the most important determinant of economic activity and prices.
• Inflation, unemployment, and output are seen as monetary phenomena.
• Unemployment is only possible in the short run, and actual output can deviate from full employment levels.
• Increasing the money supply can stimulate output and employment in the short run.
• In the long run, increases in money supply only raise the price level, not real variables like output and employment.
• The primary purpose of the Central Bank is to control the money supply to rein in inflation in the long run.

Learn about the emergence of macroeconomics, the effects of the Great Depression, and the principles of the Keynesian School. This quiz covers key concepts in economics and their historical context.