In the process of deriving effective demand, Keynes introduced many of the building blocks of modern macroeconomics:
▪ The relation of consumption to income, and the multiplier.
▪ Liquidity preference (the term given to the demand for money)
▪ The importance of expectations in affecting consumption and investment; and the idea that animal spirits are a major factor behind
shifts in demand and output.
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27-2 The Neoclassical Synthesis
Chapter 7: Epilogue: The Story of Macroeconomics
James Tobin developed the theory of investment based on the relation between the present value of profits and investment. Dale Jorgenson further developed and tested the theory.
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The IS-LM Model
The most influential formalization of Keynes’s ideas was the IS-LM model, developed by John Hicks and Alvin Hansen in the 1930s and early 1940s. Discussions became organized around the slopes of the IS and LM curves.
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Keynes and the Great Depression
Chapter 7: Epilogue: The Story of Macroeconomics
Paul Samuelson wrote the first modern economics textbook: Economics
The neoclassical synthesis refers to a large consensus that emerged in the early 1950s, based on the ideas of Keynes and earlier economists.
The neoclassical synthesis was to remain the dominant view for another 20 years. The period from the early 1940s to the early 1970s was called the golden age of macroeconomics.
Olivier Blanchard
Chapter 7: Epilogue: The Story of Macroeconomics
27-1
Keynes and the Great Depression
The history of modern macroeconomics starts in 1936, with the publication of Keynes’s General Theory of Employment, Interest, and Money.
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Theories of Consumption, Investment, and Money Demand
Chapter 7: Epilogue: The Story of Macroeconomics
Modigliani
In the 1950s, Franco Modigliani and Milton Friedman independently developed the theory of consumption, and insisted on the importance of expectations.
Epilogue: The Story of Macroeconomics
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Prepared by: Fernando Quijano and Yvonn Quijano
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Macroeconomics, 4/e
Keynes
The Great Depression was an intellectual failure for the economists working on business cycle theory—as macroeconomics was then called.
Keynes emphasized effective demand, now called aggregate demand.