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.