Aggregate demand is a business term for the sum of demands for all the goods and services in an economy at any particular time. It was made a central concept in macroeconomics by John Keynes, and is usually defined as the sum of consumers' expenditure, investment, government expenditure, and imports less exports. Keynesian theory proposes that the free market will not always maintain a sufficient level of aggregate demand to ensure full employment and that at such times the government should seek to stimulate
aggregate demand. However, monetarists and new classical macroeconomists have questioned the feasibility of such policies and this remains a critical issue in macroeconomics. Research Aggregate demand
Aggregate supply is a business term for the total supply of all the goods and services in an economy. John Keynes made aggregate demand the focus of macroeconomics; however, since the 1970s many economists have questioned the importance of aggregate demand in determining the health of an economy, suggesting instead that governments should concentrate on establishing conditions to encourage the supply of goods and services. This could entail deregulation, encouraging competition, and removing restrictive practices in the labour market. Research Aggregate Supply
Economics is a social science concerning behaviour in the fields of production, consumption, distribution, and exchange. Economists analyse the processes involved and investigate the consequences for the individual, such organizations as the firm, and society as a whole. There are many competing schools of thought in economics: the main division has been between the Classical and neoclassical schools. Adam Smith, the founder of the Classical school, emphasized primarily the concept of economic value and the distribution of wealth between the classes - workers, capitalists, and landlords. The Marxist school of thought is one of its offshoots. The neoclassical school, now the mainstream of western economic thought, emphasizes the role of allocating scarce resources between competing ends. The founders of this school, W S Jevons and M E L Walras, were known as Marginalists. Neoclassical economics is itself divided into two broad areas of research, microeconomics - analysing the relationship between individual economic units (the consumer, firm, etc.) - macroeconomics, which analyses the connection between economic aggregates, money, total employment, and government. Both fields place a heavy emphasis on the individual or household as the basic unit of analysis, rather than the classes. Research Economics
In economics, the ISLM model is a model that shows how the equilibrium levels of interest and national output are determined. It involves manipulation of the IS (investment-savings) curve and the LM (liquidity- money) curve. First formulated by John Hicks, the model works by simultaneously finding the equilibrium values of these variables in the money market and the savings-investment market. The aim of the model was to provide a framework for contrasting John Keynes' general theory with the standard neo-classical (later monetarist) theory and a basis for policy analysis. Although the ISLM model has been the standard textbook analysis for some fifty years, it lacks proper micro- foundations and has failed to resolve the major issues in macroeconomics. Research ISLM Model
Keynesianism is an approach to macroeconomics based on the work of John Keynes. Failures of co-ordination between markets, even if these are internally efficient, may generate recession and mass unemployment. For example, unemployed workers may be unable to find jobs because there is no demand for the goods they produce although these same workers would demand the goods if they were employed and earned wages. In this view, governments have a role to play by putting money into workers' pockets through public works, i.e. creating the demand and raising the level of production through the multiplier process. This view of the economy was widely accepted between the late 1940s and the 1960s, when it came under attack first by the monetarists and more recently by the new classical macroeconomists. Research Keynesianism
Macroeconomics is the study of economic aggregates and their relationships to, for example, money, employment, interest rates, government spending, investment, and consumption. John Keynes is widely credited with the foundation of macroeconomics since he sought to explain that even if the economy is operating efficiently at the microeconomic level, unemployment and recession may still occur at the macroeconomic level, because of the lack of coordination between markets. Modern macroeconomics may be summarized as an attempt to assess the validity of this proposition and to establish what role, if any, the government should play in the economy. Research Macroeconomics
Microfoundations are a basis for a macroeconomic model in which economic events are controlled by the rational utility-maximizing behaviour of individuals. It was realized in the late 1960s that traditional macroeconomic models, such as the ISLM model, had no such basis; much of macroeconomics since then has therefore focused on establishing these foundations. This has polarized the debate between monetarists and Keynesians of the 1950s and 1960s much more sharply. On the one hand, traditional monetarists emphasize the market clearing assumption, Pareto optimality, and rational expectations as a basis of analysis, while traditional Keynesians now emphasize the possibility of market failures. Research Microfoundations
The neoclassical school is the mainstream school of thought in economics, deriving from the work of the Marginalists, who defined value in relation to scarcity and regarded the balance of supply and demand as determining equilibrium prices. This method was first applied in microeconomics and used to describe the utility and profit-maximizing behaviour of individuals and firms. The neoclassical approach was set out by Alfred Marshall in his Principles of Economics, published in 1890; modern microeconomic textbooks remain remarkably similar to this work. The application of neoclassical principles to macroeconomics has been somewhat slower, since it was not immediately accepted that economic aggregates reflect the sum of individual choices. However, the development of general equilibrium theory has enabled neoclassical macroeconomists to conform to a similar pattern to that earlier established in microeconomics. Research Neoclassical School
The neutrality of money is a belief, originating from the theories of new classical macroeconomics, that the quantity of money in the economy can only affect prices (i.e. inflation), rather than such real variables as investment or the level of employment. As the economy will always operate at the natural rate of unemployment and government policies will be fully anticipated by individuals with rational expectations, choices will be adjusted to counter the effects of government policy. For example, if a government tries to raise investment, the price of investment goods will rise; this will discourage previously planned purchases, which will no longer be made, so all that will have changed will be prices, which will have increased. Research Neutrality of Money
New classical macroeconomics is a school of thought that developed in the 1970s by applying the concept of rational expectations to macroeconomic theory. Keynesians and monetarists argued that fiscal or monetary policy could be used to raise the level of output and employment in the economy at least in the short term; the new classicists, however, claimed that this was not true. In their view any reflation of the economy will be fully anticipated by individuals and firms, who will adjust their behaviour in such a way that the economy will remain unchanged in real terms. For example, if the government increased public expenditure to create jobs, taxpayers - realising that this would have to be paid for through higher taxes in the future - would reduce their present expenditure by an equal amount in order to save money to pay future tax bills. Nevertheless, the extra money injected into the economy would raise prices and cause inflation. Research New Classical Macroeconomics
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Abbreviations
Research Aggregate demand
