MACROECONOMICS

Macroeconomics

Table of Contents

Macroeconomic Theory3

Keynesian economics, Modern economic, fiscal policies of governments3

Macroeconomic Theory - 20th century4

Demand and Supply5

Factors affecting the Supply5

Inflation and Aggregate Demand6

Fiscal policy Influences Economic Activity7

Fiscal policy - Neutral, Expansionary & Contractionary Stances7

Government spending and Taxation9

Monetary policy influences Economic Activity.10

Impact of lowering the interest rates during 2008 and 200910

Reasons of impact of interest rates on Bank of England' level of expenditure10

Macroeconomics

Macroeconomic Theory

Keynesian economics, Modern economic, fiscal policies of governments

Keynesian economics is a method of analyzing the behaviour of a set of important global economic variables such as production, employment, inflation and interest rates. In the 1930's, the British economist John Maynard Keynes is the inventor of this analytical model that was intended to explain the phenomenon of the crisis of the 1930's (with the result of creating the modern field of macroeconomics). Before that time, economists generally believe that cyclical movements in employment and production would be relatively small and self-regulating (Snowdon & Vane, 2005, pp. 12-27).

The trauma of depression in 1930's has seriously challenged this optimistic view of how the macroeconomics. In the General Theory of Employment, Interest and Money (1936), Keynes argued that there are rigidities that prevent the fall in wages and prices need to return to equilibrium. The result would be a drop in consumption can create a fall in production and employment, which does not immediately correct itself and could, therefore, take some time. Keynes also identified a number of characteristics of market economies by ensuring that a drop in consumption reflected in a magnified by a multiplier effect on aggregate demand. For example, the deterioration in economic conditions may encourage companies to reduce their investments in new equipment and new plants, resulting to lower overall spending (Friedman, 1968, pp. 1-17).

The ascendancy of the original Keynesian model was challenged by macroeconomic events of the 1970s. The decade began with a recession that produced higher unemployment but without any decline in inflation. This surprised Keynesian economists, who had come to rely on the Phillips curve to portray an inverse relationship between inflation and unemployment. Furthermore, the impact of Keynesian economics on the fiscal policies of governments and on political theory can be understood through aggregate demand. It refers to the total amount you are willing to spend different sectors of the economy during a period of fact one could say in aggregate demand as the sum of all goods. Furthermore, for fiscal policy of governments, aggregate demand is the sum of consumer spending, businesses and state and the foreign sector and depends on the price level and monetary policy, fiscal policy, foreign policy and other factors.

Macroeconomic Theory - 20th century

Despite the fact that macroeconomic issues raised and studied, macroeconomics as a science emerged only in the 1930 - 1940s of 20th century. The catalyst for this was the depression of 1930s, which led to a huge decline in production in most western countries, thus gave rise to unprecedented unemployment, resulting in a significant proportion of the population of these countries to the brink of ...