Brief History of Macroeconomic Thought and Policy
Read this chapter to examine macroeconomic attitudes towards economic policies of the three main schools of economic thought: Classical, Keynesian, and Monetarist. Also, learn about modern day interpretations of the main ideas.
2. Keynesian Economics in the 1960s and 1970s
- Beginning in 1961, expansionary fiscal and monetary policies were used to close a recessionary gap; this was the first major U.S. application of Keynesian macroeconomic policy.
- The experience of the 1960s and 1970s appeared to be broadly consistent with the monetarist argument that changes in the money supply are the primary determinant of changes in nominal GDP.
- The new classical school's argument that the economy operates at its potential output implies that real GDP is determined by long-run aggregate supply. The experience of the 1970s, in which changes in aggregate supply forced changes in real GDP and in the price level, seemed consistent with the new classical economists' arguments that focused on aggregate supply.
- The experience of the 1970s suggested that changes in the money supply and in aggregate supply were more important determinants of economic activity than many Keynesians had previously thought.