The term macroeconomics was first used by the Norwegian economist Ragnar Frisch in 1933. Macroeconomics is clearly the younger sibling of the economics family. It is no coincidence that macroeconomics emerged as a major branch of economics amid the chaotic conditions of the Great Depression of the 1930s. The severe economic problems of the time lent importance to the subject matter of macroeconomics—the behavior of the economy as a whole. A book by John Maynard Keynes, The General Theory of Employment, Interest, and Money, developed a framework in which to systematically consider the behavior of aggregate economic variables such as employment and output. During the two decades following World War II, Keynes’s followers elaborated and extended his theories.
The years since the late 1960s, however, have witnessed major challenges to Keynesian economics. The 1970s saw increased interest in monetarism, the body of theory Milton Friedman and others had developed beginning in the 1940s. A new school of macroeconomic theory, the new classical economics, also came on the scene during the 1970s. In the 1980s, Keynesian policy prescriptions came under attack from a group called the supply-side economists. The 1980s and 1990s also witnessed the development of two new lines of macroeconomic research: the real business cycle theory and the new Keynesian economics.
In this book I have tried to explain macroeconomics, inclusive of recent developments, in a coherent way but without glossing over the fundamental disagreements among macroeconomists on issues of both theory and policy. The major modern macroeconomic theories are presented and compared. Important areas of agreement as well as differences are discussed.