In Chapter 1 we began our discussion of macroeconomic theory with a view of nominal wages and prices as fully flexible. This approach ensures that markets are always in equilibrium, in the sense that there is continual balance between the quantities demanded and the quantities supplied. The classical model was the dominant macroeconomic theory until the Great Depression in the 1930s. The prolonged unemployment, however, in the United Kingdom and the United States during the 1930s prompted John Maynard Keynes to significantly depart from the classical assumption of perfectly flexible prices and develop models based on the assumption that there are constraints on the flexibility of some prices.
KeywordsInterest Rate Aggregate Demand Money Demand Nominal Interest Rate Aggregate Supply
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