Macroeconomic Theory and Policy - Essay Example

The neoclassical economies aim at creating long term solutions for the economic problems with effects of inflation and government regulation being critical, while for Keynesian economies, immediate results form a major platform where the policies focus on short term goals(Evans & Seppo 2007, p. 89). This was a system that established rules for financial and commercial relations in mid 20th century among the major industrial states worldwide. This led to establishment of International Bank of Reconstruction and Development and the International Monetary Fund.

The major features of the Bretton Woods System were obligation of every country to establish a monetary policy which maintained an exchange rate of its currency to US dollar as well as ability of IMF in bridging the temporary payment imbalances in terms of gold (Evans & Seppo 2007, p. 89). Stagflation in economics describes the situation when the rate of inflation is high leading to slow rates of economic growth and high rates of unemployment. This results when economy is stagnant increasing the rates of inflation.

The situation raises economic policy dilemma as a result of exacerbation of unemployment by decreasing the rates of inflation. In version of the Keynesian macroeconomic theory dominant during the late 1970s and at the end of World War II, recession and inflation were regarded to be mutually exclusive with relationship between them described by Phillips curve. Kaldor proposed an international buffer stocks system meant to raise the prices for commodities after they become too low in order to help the developing incomes from producing and developing nations after the prices raise too high (Evans & Seppo 2007, p. 89). European Exchange Rate Mechanism (ERM) was introduced in 1979 in UK by European Community with the aim of reducing the variability and achieving monetary stability in preparation for the Economic and Monetary Union.

UK joined ERM with the aim of improving its stability in