Editing Economics (section)

=== Business cycle ===
{{Main|Business cycle}}
{{See also|Circular flow of income|Aggregate supply|Aggregate demand|Unemployment}}
[[File:Economic cycle.svg|thumb|A basic illustration of a [[business cycle]]]]
The economics of a depression were the spur for the creation of "macroeconomics" as a separate discipline. During the [[Great Depression]] of the 1930s, [[John Maynard Keynes]] authored a book entitled ''[[The General Theory of Employment, Interest and Money]]'' outlining the key theories of [[Keynesian economics]]. Keynes contended that [[aggregate demand]] for goods might be insufficient during economic downturns, leading to unnecessarily high unemployment and losses of potential output.

He therefore advocated active policy responses by the [[public sector]], including [[monetary policy]] actions by the [[central bank]] and [[fiscal policy]] actions by the government to stabilise output over the [[business cycle]].<ref>{{cite book |last1=O'Sullivan |first1=Arthur |author-link=Arthur O'Sullivan (economist) |first2=Steven M. |last2=Sheffrin |author-link2=Steven M. Sheffrin |title=Economics: Principles in Action |publisher=Pearson Prentice Hall |year=2003 |page=396 |isbn=978-0-13-063085-8}}</ref> Thus, a central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards [[full employment]] levels. [[John Hicks]]' [[IS/LM]] model has been the most influential interpretation of ''The General Theory''.

Over the years, understanding of the [[business cycle]] has branched into various [[research program]]mes, mostly related to or distinct from Keynesianism. The [[neoclassical synthesis]] refers to the reconciliation of Keynesian economics with [[classical economics]], stating that Keynesianism is correct in the [[short run]] but qualified by classical-like considerations in the intermediate and [[long run]].<ref name="Blanchard2008">{{cite encyclopedia |author-link=Olivier J. Blanchard |last=Blanchard |first=Olivier Jean |date=2008 |editor-first1=Steven N. |editor-last1=Durlauf |editor-first2=Lawrence E. |editor-last2=Blume |edition=2nd |chapter-url=http://www.dictionaryofeconomics.com/article?id=pde2008_N000041 |doi=10.1057/9780230226203.1172 |dictionary=The New Palgrave Dictionary of Economics |pages=896–899 |isbn=978-0-333-78676-5 |chapter=Neoclassical synthesis |access-date=17 November 2012 |archive-date=18 October 2017 |archive-url=https://web.archive.org/web/20171018013510/http://www.dictionaryofeconomics.com/article?id=pde2008_N000041 |url-status=live }}</ref>

[[New classical macroeconomics]], as distinct from the Keynesian view of the business cycle, posits [[market clearing]] with [[imperfect information]]. It includes Friedman's [[permanent income hypothesis]] on consumption and "[[rational expectations]]" theory,<ref>{{cite web |url=http://www.economics.harvard.edu/files/faculty/40_Macroeconomist_as_Scientist.pdf |title=The Macroeconomist as Scientist and Engineer |first=N. Gregory |last=Mankiw |publisher=Harvard University |date=May 2006 |archive-url=https://web.archive.org/web/20120118103900/http://www.economics.harvard.edu/files/faculty/40_Macroeconomist_as_Scientist.pdf |archive-date=18 January 2012}}</ref> led by [[Robert Lucas, Jr.|Robert Lucas]], and [[real business cycle theory]].<ref>{{cite encyclopedia |author-link=Stanley Fischer |last=Fischer |first=Stanley |date=2008 |editor-first1=Steven N. |editor-last1=Durlauf |editor-first2=Lawrence E. |editor-last2=Blume |edition=2nd |chapter-url=http://www.dictionaryofeconomics.com/article?id=pde2008_N000056 |doi=10.1057/9780230226203.1180 |dictionary=The New Palgrave Dictionary of Economics |pages=17–22 |isbn=978-0-333-78676-5 |chapter=New classical macroeconomics |access-date=17 November 2012 |archive-date=13 January 2014 |archive-url=https://web.archive.org/web/20140113071857/http://www.dictionaryofeconomics.com/article?id=pde2008_N000056 |url-status=live }}</ref>

In contrast, the [[New Keynesian economics|new Keynesian]] approach retains the rational expectations assumption, however it assumes a variety of [[market failures]]. In particular, New Keynesians assume prices and wages are "[[Sticky (economics)|sticky]]", which means they do not adjust instantaneously to changes in economic conditions.<ref name="Dixon2008">{{cite encyclopedia |last=Dixon |first=Huw David |date=2008 |editor-first1=Steven N. |editor-last1=Durlauf |editor-first2=Lawrence E. |editor-last2=Blume |edition=2nd |chapter-url=http://www.dictionaryofeconomics.com/article?id=pde2008_N000166 |doi=10.1057/9780230226203.1184 |dictionary=The New Palgrave Dictionary of Economics |pages=40–45 |isbn=978-0-333-78676-5 |chapter=New Keynesian macroeconomics |publisher=Palgrave Macmillan UK |access-date=17 November 2012 |archive-date=18 October 2017 |archive-url=https://web.archive.org/web/20171018013536/http://www.dictionaryofeconomics.com/article?id=pde2008_N000166 |url-status=live }}</ref>

Thus, the new classicals assume that prices and wages adjust automatically to attain full employment, whereas the new Keynesians see full employment as being automatically achieved only in the long run, and hence government and central-bank policies are needed because the "long run" may be very long.