An Overview of the Evolution of Modern Macroeconomic Theories

Abstract

This paper examines the evolution of macroeconomic theories from the 18th century to present. The manuscript starts off on giving a short analysis on the Great Depression and how it sparked numerous changes in macroeconomic policies. Then, the Classical Economic Theory is introduced and its shortcomings are examined through the Panic of 1873. Next, the paper's focus will shift to a deeper analysis on the causes, impacts, and the recovery of the Great Depression and the effects it had on the United States economy. Keynesianism and the benefits of fiscal policy are introduced and reasons for the rejection of the Classical Economic theory are explained. William Phillips' Phillips Curve is then introduced and connections between Phillips' theory and Keynes' theory are made. Lastly, the paper will examine the effects of monetary policy in the 1970s and the recent Great Recession of 2008. Most importantly, the reasons modern economists like Friedman oppose fiscal policy and Keynesianism are interpreted. From the works of these economists, the central argument of the paper advocates for the fact that we can no longer rely on the Classical Economic theory during times of economic crisis. The modern economy should be observing both Keynesianism and Monetarism; we should be pursuing expansionary fiscal policy during times of downturns and contractionary monetary policy during times of economic boom.