Macroeconomic Theory: Dynamic General Equilibrium Approach - Essay Example

John Maynard Keynes, the famous British economist in his book general Theory of Employment, Interest and Money exhibited rigorous manifestation of macroeconomics.... Deviation from laissez-faire The root of Keynesianism originates from the book, 'The general Theory of Employment, Interest and Money' published as a potential rejoinder to the great depression of the 1930s (Nunzio, 2011, p.... The second part will be discussing a post-Keynesian theory which is Milton Friedman's quantity theory of money demand and the target will be to analyze its connection with Keynesian thought and its deviation from the same....

Prior to the Keynesian revolution, the prevailing classical assumption was that while consumerist economies would be subjected to episodic distresses, market forces would function promptly and successfully to restore complete employment equilibrium (Ahiakpor 2003).... Few economists would argue that the birth of modern macroeconomics can be dated back to the upsetting incidents of the 1930s and most particularly the perspectives of John Maynard Keynes (1936) conveyed in the general Theory of Employment, Interest, and Money which is basically a response to these traumatic events....

This results in the establishment of equilibrium between price and quantity.... The graph of this model was generally called the Keynesian cross (also the AE/AP model), which was used to determine aggregate equilibrium when price level was assumed fixed (Colander, 2007, p.... Instead, as increasing numbers of economics experts were converted away from classical economics to Keynesian economics during this period, and Aggregate Expenditure and Production Curve was commonly used to depict the multiplier process seen in economic systems that were discussed by Keynes in The general Theory....

he new neoclassical synthesis borrows the general equilibrium theory from the new classical models.... It is also referred to as mathematical economics and applies mathematical approaches such as linear algebra, game theory, calculus, and computer science (Mankiw,.... The mainstream economics combines the supply and demand models of markets with Keynesian theory (Mankiw, 2006).... For example, the consumer theory of demand is a model of mainstream economics which determines how prices (costs) affect quantity demanded of a particular product....

The neoclassical approach in economics focuses primarily on income distributions, priced terminations, and outputs in the market.... This approach of neoclassical economics which undermines the contribution of the entrepreneur is sometimes harshly criticized by schools such as Keynesian economics and the Austrian school.... Kirzner (1997, p 64) argues 'Modern presentations of the entrepreneurial discovery approach have echoed these criticisms of equilibrium economics, and have deployed these criticisms in seeking to demote the concept of perfect competition from its position of dominance in modern neoclassical theory, in order to replace it by notions of dynamic competition (in which market participants are, instead of exclusively price takers, competitive price-and quality-makers)....

Basic theorems ensuring the existence of an equilibrium–which, mathematically, required solving a fixed-point problem in high-dimensional space–were already provided in the work of Arrow and Debreu (see Debreu, 1959).... However, a precise characterization of equilibrium was very difficult, due to the complexity of dynamic stochastic analysis.... Thus, Kydland and Prescott's 1982 paper made several simplifications of the general structure described by Arrow and Debreu....

At the point where the demand and supply meets is the point of equilibrium whereby demand is equal to the supply (Rossana, 2011, p.... Aside from believing that there is a perfect labor market among the firms, employers, and employees, classical economists assumed that equilibrium within the labor market is possible because of the presence of monetary wages or wage-price flexibility that could make supply and demand curve adjust with the changes in labor markets in order to remove or eliminate the presence of excessive supply and demand for labor (Rossana, 2011, p....

Based on the early macroeconomists, a macroeconomic theory emerges from the research of commerce cycles and monetary theory (Blanchard, 2009).... Before the development of macroeconomic theory, some of the classical theories advocated that monetary aspects lacked any impact on total output.... The quantity theory of wealth majorly dominated the macroeconomic theory.... The section below aims at discussing some of the reasons that led to the growth of the macroeconomics theory....