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Macroeconomics is the study of the entire economy in terms of the total
amount of goods and services produced, total income earned, the level of
employment of productive resources, and the general behavior of prices.
Macroeconomics can be used to analyse how best to influence policy goals
such as economic growth, price stability, full employment and the attainment
of a sustainable balance of payments.
Until the 1930s most economic analysis concentrated on individual firms and
industries. With the Great Depression of the 1930s, however, and the
development of the concept of national income and product statistics, the
field of macroeconomics began to expand. Particularly influential were the
ideas of John Maynard Keynes, who used the concept of aggregate demand to
explain fluctuations in output and unemployment. Keynesian economics is
based on his ideas.
One of the great challenges of recent economics has been a struggle to
reconcile macroeconomic and microeconomic models. Theorists such as Robert
Lucas Jr suggested (in the 1970s) that at least some traditional Keynesian
macroeconomic models were questionable as they were not derived from
assumptions about individual behavior.
Today the main schools of macroeconomic thought are as follows:
* 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).
* Monetarism, which holds that inflation is a monetary phenomenon. That
is, it does not wish to combat inflation or deflation by means of
demand management as in Keynesian economics, but by means of monetary
policy (essentially altering the interest rate).
* New classical economics, which emphasises the idea 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.
* 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