A Brief History of Modern Macroeconomics Flashcards
Macroeconomic theory
What economic context characterised the UK and global economies in the 1920s and 1930s?
Stagnation, mass unemployment, and the Great Depression (1929–1939), with unemployment rates of 25% in the USA (1933) and 24% in the UK (1931).
How did the Great Depression impact the USA’s real GDP in its early years?
Real GDP fell by 9.4% in 1930 and by 8.5% in 1931. By 1932, it had fallen 31% since 1929.
What was the trend in unemployment in the USA during the Great Depression?
Unemployment rose from 3.2% in 1929 to 15.9% in 1931, reaching 25% by 1932.
When did the USA begin to recover from the Great Depression, and what were the results?
Recovery began in 1934, with real GDP increasing by 7.7%, although unemployment remained high at 21.7%.
What were the key free-market views on unemployment during the 1920s and 1930s?
Belief in self-regulating markets delivering full employment, advocacy for sound money and fixed exchange rates, and blaming institutional factors like trade unions resisting wage cuts for unemployment.
How did John Maynard Keynes challenge free-market theories?
By emphasising the role of aggregate demand in determining economic activity and advocating active fiscal policy in his 1936 publication, “The General Theory of Employment, Interest, and Money.”
What did Keynes’s theories mark the birth of?
Modern macroeconomics
What was the economic orthodoxy during the Keynesian era (post-WWII to the 1970s)?
Managing aggregate demand using fiscal policy to prevent unemployment and inflation, widely adopted in the UK, USA, and Europe.
What policy tools were central to Keynesian economics?
Government spending and taxation to influence demand and counter-cyclical fiscal policies to stabilize the economy.
What achievements were attributed to Keynesian economics post-WWII?
Post-war economic growth, low unemployment, and moderate inflation for three decades.
What crisis undermined Keynesian economics in the 1970s?
Stagflation, where high inflation and unemployment occurred simultaneously, defying Keynesian policy effectiveness.
What economic theory rose in response to the failure of Keynesian policies in the 1970s?
Monetarism, led by Milton Friedman, linking inflation to excessive money supply growth.
What are the core beliefs of monetarism?
Inflation is caused by excessive money supply growth, and policies should focus on controlling inflation through restricted money supply growth.
What did supply-side economics emphasize during the free-market counter-revolution?
Improving market efficiency, deregulation, tax cuts, and labor market reforms.
How did governments respond to the financial crisis of 2008–09?
By using fiscal and monetary policies to manage aggregate demand, including fiscal stimulus and monetary innovations like Quantitative Easing (QE).
