A Macroeconomic Theory of Money, Income, and Distribution
In fall 2008, the world economy plunged into a severe recession and the relevance of macroeconomics was questioned once again. Economists were wondering about the cause of the sharp drop in production and employment triggered by the fall of celebrated financial companies such as Lehman Brothers.
The best known economic model of deep depression was initiated by John Maynard Keynes in the 1930s. He repudiated the famous Say’s law that supply creates demand and instead advocated the principle of effective demand , stating that the shortage of demand suppresses supply. See Keynes (1936). Demand and supply of goods are somehow equilibrated through the adjustment of income rather than the adjustment of prices. The labor market remains, however, out of equilibrium, at least in the short term. In contrast, the counter-Keynesian revolution began in the 1960s with the message that the price mechanism works effectively to clear the good andlabor markets after all. Starting from...
KeywordsInterest Rate Monetary Policy Money Supply Disposable Income Real Interest Rate
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