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What Are the Different Types of Macroeconomic Theories?

By Osmand Vitez
Updated May 16, 2024
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Macroeconomists study economies in an aggregate sense; economists often review these markets in terms of an entire nation or other large area. Many different macroeconomic theories exist for this process. Common theories include the Austrian school, Keynesianism, and monetarism. Each theory has its own benefits and drawbacks, with some nations attempting to implement one or more theories. In some cases, countries will vacillate between macroeconomic theories in order to maximize the economy.

The Austrian school of economics tends to believe in free markets where state involvement is not essential. A country’s fiscal and monetary policy is often seen as the cause for economic booms and busts. Other macroeconomic theories believe that the business cycle may need periodic cures, which comes from fiscal and monetary policies. State intervention, however, can result in government intervention that alters the market through laws and regulations. In this case, the self-interest of individuals may not be at the forefront of government policies, in opposition to the Austrian school of economics.

Keynesianism macroeconomic theories tend to believe in more government intervention than the Austrian school of economics. Keynesian economists believe that a government is responsible to spur the economy during an economic bust. For example, as an economy enters the contraction period of a business cycle, the government may need to intervene in order to keep the economy moving. Monetary policies can lower interest rates to start lending, government spending can go up to reduce excess supply, or other techniques may be a part of Keynesianism economics. In short, government actions can pick up where individual actions leave off.

Monetarism plays a lesser role in terms of other macroeconomic theories. Few major industrialized nations engage in this theory, either in part or in whole. The major tenets here include the role of money in the economy as explaining economic issues and trends. For example, economists may believe in a slow and steady growth in the money supply. This is in direct contrast of policies that use the money supply to alter the economy as nations look to control economic growth, contraction, or inflation.

Other types of macroeconomic theories may exist as well. For example, classical economics from the Austrian school of economics may blend with Keynesianism economics. This hybrid model attempts to bring together the best portions of each theory into the economy. Economists who recommend hybrid models to a nation or government look to have an answer for all economic problems. A drawback here, however, is using a less stable macroeconomic theory.

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