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... have added to the development of macroeconomic theory, which has developed However the question of whether we have “learnt anything” might suggest the conclusion of this essay to point in the direction of a definitive answer on how we have answered the macro problems we have been, and are currently faced with. ... As macro theory has evolved, alterations and developments have been made to the current theories of the day, on how to deal with situations such as recessions and depressions. ... I will attempt to come to a conclusion as to what we have learnt using some examples of how theory has been used successfully, (or unsuccessfully as the case may be.) Also I will have to answer the question of whether I think laissez-faire is now the dominant macro theory, and whether there is proof to suggest that it should be the dominant theory to be used by policymakers now and in the future. ... One says that policymakers should try to influence the economy by managing aggregate demand, as it is inherently unstable and, left on its own it will fluctuate away from equilibrium. ... They believe the economy is inherently stable and that any fluctuations in the economy are due to government interference. Some of their reasoning behind this is that, monetary policy affects the economy with long and unpredictable lags between the need to act and the time that it takes for these policies to work. ... The former is the time it takes from when the government recognizes the problem in the economy and their policy to be made. ...
Theorists who have taken this view that government should use laissez-faire include New Classical macroeconomists, and the Monetarists (headed by Milton Friedman
Below is the “Classical framework” as identified by Keynes. ...
Time inconsistency is an issue tied up with the argument over whether we should use discretionary or fixed rule (or laissez-faire) in our macro policy. ... It infers that the government should weigh up the situation that the economy is in, and to adjust their consequent policy to fit what they see as the appropriate course of action. If the policy makers are honest and intelligent in their actions then (according to Keynesians in particular) there is a good chance government policy will be effective. ... The government will announce their policy actions in advance of them being implemented. ... This would obviously affect government’s reputation and will make people want the government to use either laissez-faire, (as they don’t trust them) or policy rule. Policy rule is where the government fixes how they decide to act and always act in that way. This will mean the private sector can trust the government, and if the government has been untrue in their policy action in the past, they can try and repair their reputation in this way. ... Each point represents whether the private sector believes in the government, and whether the government will cheat the private sector or not. If the public believes in the government they will increase aggregate demand/output, while if the government cheat they may increase inflation. ... So In order for this not to occur there is an argument for people to want laissez-faire to be used by the government.
Approximate Word count = 2610
Approximate Pages = 10.4
(250 words per page double spaced)
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