Before the great depression of the 1930s, the classical economic views were what most people concerned with economics went by. This classical view was that unemployment would naturally take care of itself thru the process of self correction
(Rittenberg, 2012). During the depression many people lost their belief in this concept and one of them was John Maynard Keynes, a British economist …show more content…
It changed economists thinking from a concept of aggregate supply to a concept of aggregate demand. He believed that prices in the short term were sticky and, because of this, he believed that this would prevent adjustments to full employment (Rittenberg, 2012).
He thought that fiscal and monetary policy should be used to close gaps in actual and potential levels of output. The large drop in aggregate demand during the great depression is one clear example, in which demand had already dropped, after the drop in stock prices in late 1929, and after salaries came down, and it dropped even more
when governments continued to increase taxes greatly, because people were paying less taxes because of their lower incomes. It was a vicious cycle and it lasted for more than 10 years, and finally ended when world war II started, and the government started spending money again (Rittenberg, 2012).
In this paper I summarized the key developments in macroeconomics history. In particular I discussed the similarities and differences between Keynesian and classical economics, specifically how each one handles issues of unemployment. I also discussed what new developments, starting in the 1980s, have changed macroeconomic