The U.S. Great Depression - A deep recession that began in 1929 and lasted for 10 years - Output fell by 30% - Unemployment rose to 25% - It was a defining event that undermined people’s faith in markets - Led to emphasis on the short-run and the demand side of the economy and the Development of macroeconomic theory separate from microeconomics. Classical Economists - Earlier economists who focused on long-run issues - Markets were self-regulating through the “invisible hand.” - The economy would always return to its potential output and target rate of unemployment In the long run - Blamed the Depression on labor unions and government policies that prevented prices from Falling - Advocated a Laissez-faire economic policy The Essene of Keynesian Economics - First outlined in 1936 by John Maynard Keynes - Problems of the Depression required a short-run, rather than long-run, focus - Keynes famously said: “In the long run, we’re all dead.” - Adjustments to equilibrium for a single market (micro issue) and the aggregate economy (Macro issue) are different. - Keynesians argued that, in times of recession, spending is a public good that benefits Everyone - Short-run equilibrium income may differ from long-run potential income - Equilibrium income is the level of income toward which the economy gravitates in the Short run because of the cumulative cycles of declining or increasing production. - Potential income is the level of income that the economy technically is capable of Producing without generating accelerating inflation - Market forces may not be strong enough to get the economy out of a recession