Best us vacations for In the modern era, government is expected to act as a watchdog to make sure individual markets are operating as they should, and also to monitor the entire economy's performance to ensure that macroeconomic goals are achieved. In the 1930s, a revolution in macroeconomic thinking was brought about by John Maynard KEYNES. The classical school of thought, begun by Smith and continpublic 687 ued by such 19th-century scholars as David RICARDO and John Stuart MILL, concluded that the economy is self-regulating and that very little action by government was needed to achieve the macroeconomic goals of full employment, low inflation, and economic growth. The Great DEPRESSION provided a compelling argument that government should play a more active role in managing the economy, and Keynesian thinking soon began to dominate.
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According to Keynesian theory, short-run fluctuations in output, employment, and prices are the result of changes in aggregate demand. Specifically, when aggregate demand is weak, output is low and unemployment is high, and government policy can be used to restore the economy to full employment by stimulating aggregate demand with more government spending or lower taxes. Keynes saw the volatility of investment as the main cause of short-term business fluctuations, and showed that relatively small changes in spending can be multiplied into significant changes in aggregate demand because one person's spending is another person's income.
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