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Evolution of Macroeconomics as a schience: Events and Ideas - Essay Example

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This paper talks about the modifications of the macroeconomics theory throughout the last century. It is argued , that macroeconomics appears to be a field undergoing constant revolution as the world continues to encounter new economic challenges that demand new sets of thoughts…
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Evolution of Macroeconomics as a schience: Events and Ideas
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Evolution of Macroeconomics as a schience: Events and Ideas

Download file to see previous pages... This paper offers a comprehensive review of the changes in economic thought in the filed of the macroeconomic during last decades. The paper asserts, that macroeconomics is a field still undergoing constant revolution, citing 2008 financial crisis that led the abandonment of the Great Moderation consensus.
Macroeconomics focuses on the performance of the economy in its entirety. For a very long time, economists belonging to different schools of thought have attacked each other in a bid to prove that their approach is the best for emerging economic problems. However, each macroeconomic thought seems to be redundant when the world continues to encounter new economic problems demanding new thoughts all together
Prior to the Keynesian Revolution, the classical school of thought is the economic thought that dominated economic world. At that time, classical economist had not crafted any theory or model for macroeconomics. Macroeconomic thoughts were basically in the form of hypotheses.
The failure of classical macroeconomic postulates led to the emergence of Keynesian Revolution, which dominated global economic systems until mid 1960s. John Maynard Keynes steered this task in his ‘General Theory’, which formed the basis of macroeconomics.
Keynesian economics also began to exhibit flaws and this led to the development of other school of thoughts as mentioned in the paper.
The paper concludes that old theory and policies become obsolete because new macroeconomic events demand foe new approaches.
Introduction Macroeconomics focuses on the performance of the economy in its entirety. For a very long time, economists belonging to different schools of thought have attacked each other in a bid to prove that their approach is the best for emerging economic problems. However, each macroeconomic thought seems to be redundant when the world continues to encounter new economic problems demanding new thoughts all together. During 1930s, the United States capitalist system practically stopped working. The U.S free-market economy could not function at the desired level for over a decade (1929-1940). The Great Depression not only caused mayhem to the country’s economy, but to the entire world. The failure of classical economics to explain and provide solutions to the effects of the Great Recession of 1930s led to the birth of numerous economic thoughts aimed at providing answers to economic questions emanating from the underlying problems. This paper explores the classical economics and its failures that led to the development of new macroeconomic thoughts following the Great Recession of 1930s. The Classical Macroeconomics and the Great Depression Prior to the Keynesian Revolution, the classical school of thought is the economic thought that dominated economic world. At that time, classical economist had not crafted any theory or model for macroeconomics. Macroeconomic thoughts were basically in the form of hypotheses. Based on classical school of thought, free interaction of the forces of demand and supply will result into the following conditions: First, full employment will be achieved in the long-run (LR) and the problem of unemployment will only be experienced in the short-run (SR), if any. Second, there will be no overproduction or underproduction in the economy at the aggregate level. Third, the economy will ever be in equilibrium in the long-run (Dwivedi 13). However, the Great Depression of 1930s disapproved the claims of all the proponents of classical economic thought (Canterbery 11). The Great Recession “exposed the inadequacies of the theoretical foundations of the classical laissez-faire doctrine” (Dwivedi 13). At the time of Great Depression, there was unbelievably massive and high level of unemployment in almost all free-market industrial economies (Dwivedi 13). The Gross National Product (GDP) of such nations declined catastrophically (Dwivedi 13). For example, in the United States, the level of unemployment increased from 1929 3 percent to 25 percent level in 1933. Production level (of goods and services) fell by 30 percent while price level declined by 23 percent with business level falling to almost zero level (Dwivedi 13). According to Dwivedi, “the classical economics could offer neither an explanation nor a solution to the economic problems created by the Great Depression” (Dwivedi 13). Needless to say the Great Depression of 1930s brought down the classical macroeconomics. The Keynesian Revolution Following the downfall of classical econ ...Download file to see next pagesRead More
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