Macroeconomics and the Role It Thesis

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According to this theory, the spending of the government has a positive macroeconomic effect on employment and national income due to its multiplier effect. As per this theory, given the resources, the employment and output level of an economy is measured by the aggregate demand. Lack of aggregate demand causes unemployment and demand deficiency causes economic fluctuations. This demand deficiency can be eliminated by way of compensatory government spending. The Keynesian theories, however, could not provide solutions to the economic problems of developed nations. These problems included low growth, and high unemployment levels accompanied by high rates of inflation or stagflation. (Froyen, 2008)

Consequently, new schools of macroeconomic thought emerged which included monetarism, new classical monetarism, supply-side economics and new Keynesianism. According to the monetarists, the supply of money is the key factor that influences employment and output in the short run and level of prices in the long-term. According to new classical macroeconomics, the expectations of people regarding the monetary and fiscal policies of the government influence the behavior of aggregate demand and supply curves. As per supply side economics, the factors which operate on the supply side of the market have a greater role to play in the economy. According to new Keynesianism, the cost of changing prices and information problems results in price rigidities which lead to fluctuations in employment and output.

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(Froyen, 2008)

As one can see, macroeconomic theories are debatable and far from perfect. However, its dynamics and study is extremely important because both developing and developed nations are beset with macroeconomic problems like inflation, stagflation, recession, mounting debt burden and so on. Finding feasible solutions to these problems and steering a nation towards economic success requires the in depth study of the macroeconomics of that nation and the factors and forces which influence it. Keynesian theories which dominated the economic scene in most countries till the 1960s required governmental control and regulation in the economy of a country in order to achieve a high level of employment and high growth rates. This sort of intervention did help in controlling inflation and preventing business cycles but created other types problems like reduced growth rate, corruption, inefficiency, creation of parallel economy and so on. These were the outcome of faulty governmental economic policies. Creation of suitable policies and their appropriate implementation necessitates a proper "understanding of the economic system at the macro level." (Froyen, 2008) Therefore, macroeconomics affords a logical structure within which relevant techniques of intervention and formulation of appropriate macroeconomic policies can be devised in order to regulate and direct the nation on the path to economic success. (Froyen, 2008).....

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