CHAPTER 4
Basic Principles: Macroeconomics IF
ALL THE ECONOMISTS WERE LAID END TO END, THEY
WOULD NOT REACH A CONCLUSION.
– GEORGE BERNARD SHAW
Macroeconomics Macroeconomics is the study and analysis of the behaviors of markets in aggregate, as well as the behavior of governments that affect international and domestic economics. More precisely, it looks at total employment, production, consumption, imports, exports, and investment. Whereas microeconomics looks at how individuals or companies make decisions, macroeconomics analyses how municipalities, nations, regions and global markets formulate and react to governmental fiscal and monetary policy in order to achieve desired ends. While much of the remainder of the book will deal with these larger issues, some topics must be discussed beforehand. As the quote at the beginning of this chapter implies, economists do not always reach the same conclusion, even when analyzing the exact same data. Even the advances in data collection and analytical tools (a.k.a. models) cannot bring about a single, definitive approach to how markets and government should interact. Currently, the biggest split in macroeconomic approaches is between the Keynesian economists and those of the New Classical Macroeconomics school (NCM). This divide centers around how each school views decision making, the role of government, and the efficiency of policy making. KEYNESIAN SCHOOL
Briefly summarized, the Keynesian school makes no presumption that all consumers and sellers arrive at their decisions rationally—some do, some don’t. Because of this view, the market forces described by Adam Smith as an “invisible hand” are not necessarily considered efficient or desirable. Government is a needed and welcomed controller of these two sometimes irrational decisionmakers, resulting in outcomes favorable to the nation as a whole. Secondly, Keynesians believe that changes in the supply side only have a long-term effect, making government intervention necessary to control the short-term. Lastly, the followers of Keynes posit that the government, through fiscal and monetary policies, should control demand for specific products and for their subject economy as an aggregate. NEW CLASSICAL MACROECONOMICS
Proponents of NCM are almost diametrically opposed to Keynesians on these matters. To them, consumers and suppliers are rational agents acting in what is ultimately an efficient manner, producing favorable outcomes. The “invisible
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