Macroeconomics is highly controversial. There is no universal agreement among economists as to how the economy functions at a macroeconomic level. Instead there are various schools of thought.
Although there are many of these schools, they are often grouped into two broad categories: Keynesian and monetarist.
In this chapter we focus on the theory developed by John Maynard Keynes in the 1930s (see Box 8.1), a theory that has had a profound influence on economics. Keynes argued that, without government intervention to steer the economy, countries could lurch from unsustainable growth to deep and prolonged recessions.
In Sections 8.1–8.4 we examine what determines the level of national output and why it tends to fluctuate (i.e. why there is a business cycle). As we shall see, Keynes placed particular emphasis on the role of aggregate demand in determining economic activity. If aggregate demand is too low, there will be a recession with high unemployment. On the other hand, if aggregate demand is too high, there will be inflation.
Then in the remainder of the chapter (Sections 8.5–8.6), we look at the use of government policy, especially fiscal policy, to control aggregate demand so as to stabilise the level of output and keep the economy as close as possible to full employment.
