Editing Macroeconomics (section)

===Keynes and Keynesian economics===

When the Great Depression struck, the reigning economists had difficulty explaining how goods could go unsold and workers could be left unemployed. In the prevailing [[neoclassical economics]] paradigm, prices and wages would drop until the market cleared, and all goods and labor were sold. Keynes in his main work, the ''General Theory'', initiated what is known as the [[Keynesian Revolution]]. He offered a new interpretation of events and a whole intellectural framework - a novel theory of economics that explained why markets might not clear, which would evolve into a school of thought known as [[Keynesian economics]], also called Keynesianism or Keynesian theory.<ref name=Blanchard/>{{rp|526}}

In Keynes' theory, [[aggregate demand]] - by Keynes called "effective demand" - was key to determining output. Even if Keynes conceded that output might eventually return to a medium-run equilibrium (or "potential") level, the process would be slow at best. Keynes coined the term [[liquidity preference]] (his preferred name for what is also known as [[money demand]]) and explained how monetary policy might affect aggregate demand, at the same time offering clear policy recommendations for an active role of fiscal policy in stabilizing aggregate demand and hence output and employment. In addition, he explained how the [[multiplier effect]] would magnify a small decrease in consumption or investment and cause declines throughout the economy, and noted the role that uncertainty and [[Animal spirits (Keynes)|animal spirits]] can play in the economy.<ref name=Blanchard/>{{rp|526}}

The generation following Keynes combined the macroeconomics of the ''General Theory'' with neoclassical microeconomics to create the [[neoclassical synthesis]]. By the 1950s, most economists had accepted the synthesis view of the macroeconomy.<ref name=Blanchard/>{{rp|526}} Economists like [[Paul Samuelson]], [[Franco Modigliani]], [[James Tobin]], and [[Robert Solow]] developed formal Keynesian models and contributed formal theories of consumption, investment, and money demand that fleshed out the Keynesian framework.<ref name=Blanchard/>{{rp|527}}