Macroeconomics


History of macroeconomic thought
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Macroeconomic theory has its origins in the study of business cycles and monetary theory. John Maynard Keynes attacked earlier theories and produced a general theory of the economy that described the whole economy in terms of aggregates instead of looking at individual, microeconomic parts. Keynes attempted to explain unemployment andrecessions. He argued that the tendency for people and businesses to hoard cash and avoid investment during a recession invalidated the assumptions of earlier, "classical" economists who thought markets always clear, leaving no surplus goods and no willing labor left idle.
A generation of economists following Keynes synthesized his theory with neoclassical microeconomics to form the neoclassical synthesis. Keynesian theory originally omitted a theory of price levels and inflation. Later Keynesians adopted the Phillips curve to model price level changes. Some Keynesian economists opposed the synthesis method of combining Keynes's theory with an equilibrium system and advocated using disequilibrium models instead. Monetarists, led by Milton Friedman, adopted some Keynesian ideas, such as the importance of the demand for money, but argued that Keynesians ignored the money supply's role in inflation. Robert Lucas and other new classical macroeconomists criticized Keynesian models that did not work under rational expectations. Lucas also argued that Keynesian empirical models would not be as stable as models based on microeconomic theories.

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