Macroeconomics considers the performance of the economy as a

whole, which involves two major approaches to study the pattern

and influence on the economy. Economists who believe in either of
the types of thoughts are at loggerheads about various aspects
about the way the economy influences people and vice-versa

Says Law:
The classical economists based their predictions about
full employment on a principle known as Says Law, the
creation of French economist J. B. Say (17761832).
According to Says Law, Supply creates its own
demand. In other words, in the process of producing
output, businesses also create enough income to ensure
that all the output will be sold. Because this theory
occupies such an important place in classical economics.

Flexible Wages and Prices:

The classical economists believed that all prices
including wage rates (the price of
labor) and other input priceswere highly flexible.
They believed that Says Law and the flexibility of
interest rates would ensure that spending would be
adequate to maintain full employment.

Full Employment:
As a consequence of their faith in Says Law and the
flexibility of wages and prices, the classical economists
viewed full employment as the normal situation. They
held this belief in spite of recurring periods of
observed unemployment. By the mid 1800s,
economists recognized that capitalist economies tend
to expand over time but not at a steady rate. Instead,
output and employment fluctuate up and down,
growing rapidly in some periods and more slowly, or
even declining, in others.

Laissez-Faire:
The classical theorists belief in the economys ability
to maintain full employment through its own internal
mechanisms caused them to favor a policy of laissezfaire, or government by nonintervention. Society was
advised to rely on the market mechanism to take care
of the economy and to limit the role of government to
the areas where it could make a positive contribution
maintaining law and order and providing for the
national defense, for example.

The Great Depression

The Great Depression was a period of worldwide
economic depression that lasted from 1929 until
approximately 1939. The starting point of the
Great Depression is usually listed as October 29,
1929, commonly called Black Tuesday. This was
the date when the stock market fell dramatically
12.8%..
However,
the
actual
causes of the Great Depression are much more
complicated than just the stock market crash. In
fact, historians and economists do not always
agree about the exact causes of the depression.

The Great Depression

The
Great
Depression
was
a
devastating time with far reaching
global
effects.
Banks
failed,
unemployment reached 25%, and it
took 27 years for the stock market to
reach pre-crash levels. Those who
grew up during the Great Depression
never outgrew its effects.

The Great Depression

Throughout 1930, consumer spending continued
to decline which meant businesses cut jobs
thereby increasing unemployment. Further, a
severe drought across America meant that
agricultural jobs were reduced. Countries across
the globe were affected and many protectionist
polices were created thereby increasing the
problems on a global scale.

Three main reasons

1. Stock Market Crash of 1929:
Many believe erroneously that the stock market crash
that occurred on Black Tuesday, October 29, 1929 is
one and the same with the Great Depression. In fact,
it was one of the major causes that led to the Great
Depression. Two months after the original crash in
October, stockholders had lost more than $40 billion
dollars. Even though the stock market began to
regain some of its losses, by the end of 1930, it just
was not enough and America truly entered what is
called the Great Depression.

Three main reasons

2. Bank Failures:
Throughout the 1930s over 9,000 banks failed.
Bank deposits were uninsured and thus as banks
failed people simply lost their savings. Surviving
banks, unsure of the economic situation and
concerned for their own survival, stopped being as
willing to create new loans.

Three main reasons

3. Reduction in Purchasing Across the Board:
With the stock market crash and the fears of further
economic woes, individuals from all classes stopped
purchasing items. This then led to a reduction in the
number of items produced and thus a reduction in the
workforce. As people lost their jobs, they were unable
to keep up with paying for items they had bought
through installment plans and their items were
repossessed. More and more inventory began to
accumulate. The unemployment rate rose above 25%
which meant, of course, even less spending to help
alleviate the economic situation.

The role of demand side:

Keynesian
economics
places
central
importance on demand, believing that on
the macroeconomic level, the amount
supplied is primarily determined by
effective demand or aggregate demand. For
example, without sufficient demand for the
products of labor, the availability of jobs will
be low; without enough jobs, working
people will receive inadequate income,
implying insufficient demand for products.
Thus, an aggregate demand failure involves

Wage/Price rigidity:
Keynes argued that the classical assumption of highly flexible
wages and prices was not consistent with the real world. According to Keynes, a variety of forces prevent prices and wages
from adjusting quickly, particularly in a downward direction.
First, markets are less competitive than the classical theory
assumed. Keynes saw that many product markets were
monopolistic or oligopolistic. When sellers in these markets
noted that demand was declining, they often chose to reduce
output rather than lower
prices. And in labor markets, particularly those dominated by
strong labor unions, workers tended to resist wage cuts. As a
consequence, wages and prices did not adjust quickly; they
tended to be rigid or sticky.

Equilibrium with unemployment:

Keynes and the classical economists agreed that the
economy would always tend toward equilibrium, but
they disagreed about whether the level of output at
which the economy stabilized would permit full
employment. In the classical model the economy tends
to stabilize at a full-employment equilibrium. In the
Keynesian model the economy tends toward
equilibrium but not necessarily at full employment.
When the economy is in equilibrium at less than full
employment, an unemployment equilibrium exists.

Government intervention:
Because Keynes did not believe that a market economy
could be relied on to automatically preserve full
employment and avoid inflation, he argued that the
central government must manage the level of aggregate
demand to achieve those objectives. How could this be
accomplished? One approach was through fiscal
policy, the manipulation of government spending and
taxation in order to guide the economys performance.
Another approach would be to use monetary policy:
policy intended to alter the supply of money in order to
influence the level of economic activity.