Introduction to Macro-Economics: The Big Picture
The Two Branches of Macro-Economic Theory
Thinking like a Mac ro-Economist:
John Maynard Keynes and Milton Friedman
The United States is a capitalistic economic system but other have and currently do exist.
Below is an amusing look at some comparative economic systems:
Feudalism: You have two cows that your feudal landlord owns. Your landlord takes some of the
milk and lets you have the rest.
Communism: You have two cows. Your neighbors help to take care of them and the government
tells you how much milk you can produce. You all share the milk.
Dictatorial control: You have two cows. The government takes them both, denies they ever
existed, then drafts you into the army. Milk is banned.
Capitalism: You have two cows. You sell one and use the proceeds to buy a bull. Your herd
multiplies, you sell them, and then retire.
Macro-economics is perhaps the most divisive area of economics when applied to political
decision making, and macro-economists divide themselves into different schools of thought. Two
of the biggest camps are the Keynesians and the Monetarists. Keynesians and post-Keynesians
follow the theories of John Maynard Keynes, the most-celebrated economist of the 20th century
who proposed that government stabilize the economy with the use of fiscal policy. Monetarists,
on the other hand, follow the teachings of Friedrich Hayek.
1. Compare and contrast what policies Keynes and Hayek advocated regarding how the federal
government should manage the economy. (Note: There is no need to include biographical
information about their lives)
2. Explain one real-world event that counters the theories of each of the following: Classical,
New Classical, Keynesian, New Keynesian, and Monetarist.
3. Explain one real-world event that supports the theories of each of the following: Classical,
New Classical, Keynesian, New Keynesian, and Monetarist.
4. You have learned that Keynes and Friedman sharply differed on some basic ideas of how the
Federal government should conduct economic policy. Which of the two economists do you agree
with more, and explain why.