Macroeconomics

Macroeconomics is the economics sub-field of study that considers aggregate behavior, i.e. the study of the sum of individual economic decisions. This is in contrast to microeconomics which is the study of the economic behaviour of individual consumers, firms, and industries.

Analytical approaches

The traditional distinction is between two different approaches to economics: Keynesian economics, focussing on demand, and supply-side (or neo-classical) economics, focusing on supply. Neither, of course, can completely neglect the other aspect - it is a question of emphasis. Most schools are fairly clearly based on one or the other approach.

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• Keynesian economics, which focuses on aggregate demand to explain levels of unemployment and the business cycle. That is, business cycle fluctuations should be reduced through fiscal policy (the government spends more or less depending on the situation) and monetary policy. Early Keynesian macroeconomics was "activist," calling for regular use of policy to stabilize the capitalist economy, while some Keynesians called for the use of incomes policies.
• Supply-side economics, which delineates quite clearly the roles of monetary policy and fiscal policy. The focus for monetary policy should be purely on the price of money as determined by the supply of money and the demand for money. It advocates a monetary policy that directly targets the value of money and does not target interest rates at all. Typically the value of money is measured by reference to gold or some other reference. The focus of fiscal policy is to raise revenue for worthy government investments with a clear recognition of the impact that taxation has on domestic trade.

Schools

• Monetarism, led by Milton Friedman, which holds that inflation is always and everywhere a monetary phenomenon. It rejects fiscal policy because it leads to "crowding out" of the private sector. Further, it does not wish to combat inflation or deflation by means of active demand management as in Keynesian economics, but by means of monetary policy rules, such as keeping the rate of growth of the money supply constant over time.
• New classical economics, which explores the implications of rational expectations. Their original theoretical impetus was the charge that Keynesian economics lacks microeconomic foundations -- i.e. its assertions are not founded in basic economic theory. This school emerged during the 1970s. This school asserts that it does not make sense to claim that the economy at any time might be "out-of-equilibrium". Fluctuations in aggregate variables follow from the individuals in the society continuously re-optimizing as new information on the state of the world is revealed.
• New Keynesian economics, which developed partly in response to new classical economics. It strives to provide microeconomic foundations to Keynesian economics by showing how imperfect markets can justify demand management.
• Austrian economics is another laissez-faire school of macroeconomics. It focuses on the business cycle that arises from government or central-bank interference that leads to deviations from the natural rate of interest.
• Post-Keynesian economics represents a dissent from mainstream Keynesian economics, emphasizing the role of uncertainty and the historical process in macroeconomics.