Macroeconomics is the study of the national economy. Economists in this field look at how entire economies make decisions, compared to microeconomics, which looks at how individual decisions affect the larger economic picture. According to macro economics experts, a nation’s GDP, unemployment rates, national income, consumption of goods, savings, inflation, international trade and international finance all affect a nation’s prosperity. When looking at the current recession, we see many truths in what these economists are saying; and yet, many critics also point out that macroeconomic theory falls short of the complete picture.

Macro-economics gained traction in the thirties as basic economics shifted toward understanding the causes of the Great Depression. British economist John Maynard Keynes emerged as the dominant theorist of the time, espousing his view that private sector decisions had brought down the economy as a whole. An additional reason for economic downturns was a reduction in aggregate demand, Keynes argued. So a government could then focus their policies on creating more demand (hence, tax cuts and stimulus checks). Furthermore, the government could reduce interest rates and invest in infrastructure to further aid the ailing economy. Keynes believed that economic intervention, which involves targeting taxes, handing out tax credits, legislating minimum wage, subsidizing select commodities, capping prices, setting production quotas and regulating tariffs, could ultimately prevent another Great Depression.

Another concept of macroeconomics that applies to recessions is called monetary policy. Unlike fiscal policy, which is regulated by the President and Congress, monetary policy is regulated by the Federal Reserve System, the nation’s central banking institution. During a recession, the Federal Reserve has the power to reduce the reserve ratio or lower the federal funds rate, which lets banks keep more of their assets as accessible money, rather than reserves, thereby offering more attractive loans to customers and keeping economic growth high. Another action the Federal Reserve may take is to lower the discount rate on federal loans, which can free up money for banks that have borrowed from the Reserve, thus offering consumers better loans. Lastly, the Federal Reserve may save its own money to buy government bonds and put more money into the economy. While some of these actions may sound good, they must be careful not to meddle in free markets too much or the economy may wind up in worse shape than before.

We can see many of the government’s current actions influenced by Keynes and his theory of macroeconomics. For instance, the Obama administration has intervened by granting tax cuts, splurging on infrastructure, doling out stimulus checks to inspire consumption and capping credit card interest rates. We have also learned a few sobering lessons about our past macroeconomic beliefs. For one, we must look at monetary policy rules for interest rates and things like asset prices and bubbles, as an indicator for how well the economy is doing. In the past, we just looked at unemployment and inflation. Secondly, we must also not assume that private free markets will naturally proliferate, without any sort of government oversight. It’s now believed that liberal government policy is partially to blame for a lot of this mess.

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