Free Essay Sample on Macroeconomic Theories

Published: 2019-10-10 03:19:15
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Macroeconomics deals with the effect of general decision-making on the capital markets. It looks at the various behaviors and performances that are likely to create a shift on the various economies. This aspect of economics largely explains the various general factors that are responsible for the economy, for instance, national scales of productivity and the fluctuating rates of interest across financial borders. In the process, various models are developed in a bid to explain how investments, savings, consumption and inflation can create a ripple effect in the economy.

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It is to this effect that different theories were formulated. These theories aimed at explaining how and why the market behaves as it does. These theories also further provide possible predictions of market behavior. They explain whether to expect losses or profits, or which investment portfolios to consider. In the year 1936, John Keynes attempted to explain what happened to the world market during the Depression. This period was marked by the overwhelming presence of goods in the market, which remained unsold, and the high number of unemployed workers.

It is necessary to determine the relationship that exists between the factors that are responsible for individual happiness. Economists endeavor to interpret how economies would cope in the presence, or absence of certain factors. Inflation and consumption remain the major factors that determine how the market functions (Evans and Honkapohja, 2012). Every macroeconomic theory provides important insight, and the proposed measures against complete disruption of the market. They show the relationship that exists between supply, demand and the effects of modernized banking systems. They also explore the possibility of the presence of different views that are related to macroeconomics, and business as a whole.

The Keynesian theory states that supply and demand are in constant competition. Under most circumstances, demand always supersedes supply. John Keynes believed in the fact that economic markets do not possess the ability to be perfect. In addition, when the savings exceed investments, the economy strains, because a fluid economy is dependent on the in and out flow of cash and stocks. A strained economy causes a ripple effect in other sectors that are dependent on finances. Increased supply often leads to an increase in demand. Keynes theorized that markets are able to sustain themselves, even in the absence of government interference. Fiscal and monetary policies are often the near-death of economies. When the government invests in all forms of infrastructure, it prevents creativity of the market. This theory states that rigid salary rates are dangerous to the economy. In addition, wage reduction is proportional to reduced spending, which, long term, causes a downward spiral of the economy.

Inflation, unemployment, capital and investments are factors in macroeconomics. These factors affect individuals, but macroeconomics looks at their impact on the economy on a global scale. The perception of certain individuals is that inflation is slightly lower than unemployment. A marked increase in either of the two factors causes unhappiness (Blanchflower et. al 2014). Inflation and employment are the major issues that are theorized by macroeconomists. There have been concerted efforts to relate the level of happiness to the level of the aforementioned factors. The current policy on macroeconomics states that the central bank is responsible for reducing inflation, while concurrently keeping at a minimum the losses that accompany unemployment. In various countries in Europe, a 1% rise in the inflation rate translates into more than five times the unemployment rate. Most of the European population remains concerned that the steady rise in inflation rates is likely to translate into a difficulty in product acquisition, and in the long run, general unhappiness. Using the Ordinary Least Squares to determine happiness levels, a regression equation is derived to determine how unemployment affects the welfare of individuals within a particular setting.

In the views of Arthur Okun, misery levels are a sum of the unemployment rates and inflation rates. This misery index states that the ratio of inflation and unemployment shifts annually, thereby calling for the need of objectivity. Monetarism borrows from the Keynesian theorys perspective on currency. An increase in the supply of money leads to higher spending. However, when the supply of money diminishes, spending declines. This provides an element of control on aggregate demand. This theory, therefore, looks at the role played by central banking systems in economies. The major tenet of the monetarist theory is that in a globalized economy, monetarism would cause a decline in the value of external economies especially in economies that are the determinant of the other minor economies. However, the uncontrolled use of credit creates a vacuum in the market. It translates to the spending of money that does not exist. The downside to this theory does not subjectively take into account the importance of capital. Manipulation of the supply of money has a negative effect on other aspects of the economy.

Functions of macroeconomics have premises on the central banks ability to be insusceptible to monetary policies. Based on the Philips curve, inflation, well-being and unemployment are dynamic, depending on the age bracket of the subjects. The Keynesian model emphasizes the central banks objective to minimize quadratic loss; a function that is linear to the Philips curve. The past statistics inform the future. Omission of the same creates a bias. However, the variances in the factors and the natural rates inform why the central bank chooses to focus on inflation, rather than unemployment.


Blanchflower, D. G., Bell, D. N., Montagnoli, A. & Moro, M. (2014). Journal of Money, Credit and Banking, 46, 2, Ohio State University.

Evans, G. W., & Honkapohja, S. (2012). Learning and expectations in macroeconomics. Princeton University Press.

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