How Have Macroeconomic Policys Changed Essay

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Section 2 Since the 1930s, there have been shifts in the school of thoughts. These shifts happen due to economic theories constantly changing; how economists look for new solutions from the economic problems that we encounter. There have been many macroeconomic issues since the 1930s that have brought about these changes. Until the early 1930s the classical model was well represented, but with the great depression in the 1930s; the macroeconomic problems that we were facing. We inevitably saw the classical model challenged. John Maynard Keynes ideas caused a shift which saw the Keynesian model come into place in the late 1930s. For many economists, it was the Great Depression that helped the confirmation of Keynes’s ideas. For example, a sudden decrease in aggregate demand was thought that caused the macroeconomic problems. This caused a ‘Recessionary gap’ where a fall in aggregate demand took an economy from above its potential output to below its potential output. From post-World War2 Keynesians Economics became widely accepted where it became the standard economic model for USA between the 1940s-1970s and was seen to be globally effective. However, the 1970s saw the demise of the Keynesian model where we saw wide spread inflation and oil prices started to rise. The idea of the Phillips curve relationship then seemed to break down as a result. It broke down due to the relationship work beyond the short run. The curve displayed the short run adjustment process of the economy, assuming money illusion on behalf of workers. Because of this we saw a significant change in British macroeconomic policy in 1970 where with high inflation and political problems there was a shift from Keynesians school of thought to Monetarist economic theory. The policies undertaken by Keynesian thought that fluctuations in economic output and inflation are due to the cycles of the real

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