Macroeconomic Theories
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The macroeconomic theories deal with the three main issues: fiscal policy, monetary policy, employment, and interests. Fiscal policy is a policy that tries to influence the direction of the economy through changes in the taxes spending by the government. Monetary policy is the process conducted by the central banks and is meant for money supply control in an economy (Baddeley., 2017). Keynesian is that of about an economic-based theory on the ideas of John Maynard Keynes.
There are three main theories of macroeconomic: Monetarist theory, Austrian theory, and Keynesian theory. To start with is Austrian theory, this theory focuses on the money supply effect on the macroeconomic and the central banking role on an economic system. The theory displays some of the principles, including opportunity cost, capital interest, inflation, business cycles, and the organizing power of markets. According to the theory, the opportunity cost is the cost incurred by the consumer or the business by lacking a choice to make (Makoni, 2015). This means that the good must account for the value of the alternative best commodity.
According to the theory, the second principle is that of capital and interest; the backbone of interest and profit are the demand and supply of a particular commodity. Hence the time of consumption matters a lot. According to the theory, consuming a commodity in the present day is better than consuming the same commodity in the coming days. The third principle is on inflation, where, according to the theory, the increased supply of money leads to the rise in the prices and wages (Baddeley., 2017). This is basically due to the profit made by the business.
The fourth principle is on the business cycle, where, according to the theory, when the business fails more than it succeeds, that means it’s losing the interest that it should be gaining. Hence when it comes to the repayment of the debts that the business had, it becomes problematic. The last principle of this theory is on the market’s organizing power (Sangkuhl., 2015), where the theory argues that no one knows the real price of a particular good. Still, the markets generally set the optimal price of that good.
The second theory is the Keynesian theory, which states that the supply produced will not always be met by the demand average. The fundamental principles include unemployment, where the theory states that low wages lead to low spending, leading to downward spirals. The second principle is on excessive savings, where the theory states that excessive savings lead to reduced spending and reduced investments (Lavoie., 2018). The third principle is on the fiscal policy, where the theory states that the government should enhance informed fiscal policy to reduce the extremes of economic fluctuation.
The third theory is that of monetarists. This theory focuses on central banking’s role in an economic system and the effect of the supply of money. The theory lately stated that there is an assumption of the value of capital, and hence also the value of capital in an economy is assumed. Also, in the monetarist theory, it’s evident that the increase in money supply leads to higher spending, while with the lowering of the money supply, there is a lowering of the spending. The relationship between money and spending is the main difference between the classical monetarist economist and the Keynesian (Sangkuhl., 2015). There is a disagreement between Keynesian and classical economists about such relationships.
In the monetarist theory, the expansion of the money supply would have stimulated the economy. This is because the increased money supply would have encouraged the increased economic activity, which would have prevented the Great Depression a great deal. According to the Keynesian AD-AS curves. The shift of the aggregate demand curve to the right leads to the rise in the price level; this is due to the exogenous events’ presence. While the shift of the aggregate supply curve to the right led to the lowering of the price, this also is in the presence of exogenous events (Lavoie., 2018). This contradicts the monetarist because there is an increase in spending, which increases demand with the increase in the money supply. This led to economic activities hence solution to the problem of the Great Depression.
References
Baddeley, M. (2017). Investment: Theories and Analyses. Macmillan International Higher Education.
Makoni, P. L. (2015). An extensive exploration of theories of foreign direct investment. RISK GOVERNANCE & CONTROL: Financial markets and institutions, 5(2), 77-83.
Sangkuhl, E. (2015). How the macroeconomic theories of Keynes influenced the development of Government Economic Finance Policy after the great depression of the 1930’s: Using Australia as the Example. Athens Journal of Law, 1(1), 32-52.
Lavoie, M. (2018). Rethinking macroeconomic theory before the next crisis. Review of Keynesian Economics, 6(1), 1-21.