Summarize Key Developments in Macroeconomic History.
We are all human beings and we fall and learn from our own mistakes. Why do we fall? So we can learn to pick ourselves up. The developments in macroeconomic history were the same. We learn from the past then try to explain it and fix it. To summarize the key developments in macroeconomic history, we can follow the big events such as the Great Depression or the Great Recession to get the timeline more quickly.
In the 1930s, under the Great Depression’s cruel grip, the collapse defies the dominant economic theory which was “economies should be able to reach full employment through a process of self-correction.” The economics try to fix the old ideas of macroeconomics and replace it with something new and effective. Unfortunately, the Great Depression still lasted for more than a decade.
Then, time moves to the 1960s. While most economists believe that Keynes’s can effectively explain how to solve the problem, the tools Keynes suggested have won widespread acceptance among governments all over the world. But there are always some different ideas come out, economist Milton Friedman argues that money, not fiscal policy, is what affects aggregate demand. He insists that monetary policy should not be used to move the economic activity.
When It comes to the1970s. While Keynes’s theory can not perfectly explain everything, several other economists begin work on a radically new approach to macroeconomic thought.
The Great Recession and the financial crisis in the late 2000s, all follow the same process which is fall, recover and learn how to deal with it when it comes again. Although there are many rounds of controversy, we are still in the natural evolution progress.
The similarities and differences between Keynesian and classical economics
The Similarities
The first similarity between Keynesian and classical economics is that both of the two are trying to reduce unemployment. They all think unemployment is a big problem and we must have a solution to deal with it. The second similarity is that both of the two ideas pay attention to the price, spending which is the flow of the economy.
The differences
Although both Keynesian and classical economics was trying to help us deal with the problems, their solutions were not the same. The most significant divergence is the involvement of governments. Keynesian suggested that the monetary and fiscal system can be a tool to solve the problem effectively and it's quick. In contrast, classical economics tends to hold back the tools and let the market, the economy recover by itself.
How does each handle issues of unemployment?
As I said, they all want to handle issues of unemployment and depression, but the solutions are different. If the governments take advantage of the monetary and fiscal system which is Keynesian suggested, they can quickly adjust the unhealthy parts of the downward economy and move it to a healthier situation. The classical economics, in contrast, suggested that the economy would right itself, and returning to the natural level of employment.
What new developments starting in the 1980s have changed macroeconomic thought?
After the 1980s, the greater use of microeconomic analysis came out, thus better explained the macroeconomic phenomena. Since the monetary policy has become a tool for the governments to use during a weak economy period, the central bank such as the Fed plays a crucial role in the economic system. A significant advance in monetary policy came in the 1990s, under Federal Reserve Chairman Alan Greenspan. The Fed shifted to an expansionary policy as the economy slipped into a recession when Iraq’s invasion of Kuwait in 1990 began the Persian Gulf War and sent oil prices soaring. As a result, the real GDP was rising, but the economy remained in a recessionary gap. After that, The Fed, for the first time, had explicitly taken the impact lag of monetary policy into account. The issue of lags was also a part of Fed discussions in the 2000s.
Advances in fiscal policy and the interest.
When Reagan defeated the Democratic Jimmy Carter in the 1980 election campaign. The Republican Party also won the first half of the Senate in 26 years. Reagan’s economic policy is supply-side economics, known as Reagan’s economics, which reduces income taxes by 25%, reduces inflation, lowers interest rates, increases military spending, increases government deficits and national debt. He deregulation of business moves the US economy to start a strong economic growth in 1982 after a sharp recession in 1981-1982. President Reagan is skeptical about the ability of the federal government on dealing with these kinds of problems, especially in economic matters. His solution is to withdraw government intervention and reduce tax rates and commercial controls so that free-market mechanisms can automatically correct the problems of its own. However, In 1990, with the economy slipping into a recession, President George H. W. Bush agreed to a tax increase despite an earlier promise not to do so. President Bill Clinton, whose 1992 election resulted largely from the recession of 1990–1991, introduced another tax increase in 1994, with the economy still in a recessionary gap. Both tax increases were designed to curb the rising deficit. But the US Congress in the first years of the 1990s rejected the idea of using an expansionary fiscal policy to close a recessionary gap on grounds it would increase the deficit.
The recession Threatening the Economy Largely
All of the discussions and advances above, tend to have different solutions on less or more government intervention, the federal deficit, and government spendings. However, the tax cuts had provided only a minor amount of stimulus to the economy, while people tend to save money not to spend it, and the recession threatening the economy was larger than they thought.
The New Keynesian Economics School
New problems always come out with a new idea. New Keynesian economics successfully incorporated important monetarist and new classical ideas and provided a solution for many people who lack the confidence in the ability of the monetarist or the new classical school alone to explain the macroeconomic change.
The Deregulation of the banks
The deregulation of the banking industry was a crucial matter in the early 1980s because it's produced sharp changes in the ways individuals dealt with money. Such as the introduction of bond funds offered by banks that allowed customers to earn the higher interest rates paid by long-term bonds while at the same time being able to transfer funds easily into checking accounts as needed.
Advances with Stable and Unstable
The experience of the 1980s, 1990s, and 2000s makes monetary policy much more controversial, while someone thought it's an inappropriate tool that contributes just for short term goals.
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