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1.Describe the developments of Macroeconomic theory in the last 50 years. In particular, discuss the drawbacks of the (old) Keynesian approach, and Lucas Critique, the motivation for general equilibrium models, neoclassical models, new Keynesians models.Under the circumstance of Great Depression, which made it a debate that what government matters, Keynes’ General Theory of Employment, Interest and Money gave a profound intellectual impact, essentially creating the subject of macroeconomics as it is now understood. He thought that public spending, especially the government budget deficit, should be utilized to stimulate the social aggregate demand. The novel points of Keynes’ theory are that how wage rigidity and increasing employment fit together; emphasize the simultaneous determination of a set of key variables (e.g. employment, income, interest rates, and prices) by one another at the same time; and provided the conceptual framework within which simultaneous-equation econometric models of the economy could be developed, for purposes of forecasting and quantitative policy analysis.1However, Keynes’s General Theory exhibited some drawbacks. First, Keynes thought the market was in the equilibrium itself, and as macro became a quantitative subject, the connections with themicroeconomics were less and less explicit. This problem is referred as the need for “microfoundations for macroeconomics”. Second, Keynes’s theory treated the wages and prices as given, thus assumed away the problem of inflation as the result of excessive aggregate demand. The Great Inflation happened in the 1970s, made the policy makers think that Keynes may be wrong in some aspects. This phenomenon stimulated the forming and expanding of new classical theories.In the process of the new classical all-out attack on Keynesian macroeconomics, Lucas was the leading character in the movement. The most influential of Lucas’s judgments about Keynesian theory is the famous ‘Lucas critique’, which asserts that the econometric models of the time, all derivatives of the Klein-Goldberger model, could not serve their avowed purpose of comparing alternative economic policies because the coefficients of the models were estimated by econometric methods (rather than being derived from theory), and their numerical values were independent of any changes in institutional regime that might occur2. And then, Lucas and his allies led to the emergence of real business cycle modelling under Kydland and Prescott’s lead and following, the emergence of dynamic stochastic general equilibrium (DSGE) modelling.And then, those economists, who wanted to re-habilitate Keynes’s insights, while accepting the mainstream of new views of strong microfoundations, formed the faction of “New-Keynesian”. All these models shared the same purpose of amending new classical conclusions, thereby reviving Keynes’s mitigated view of the market system. The price to be paid for this endeavor was a stricter1Woodford, M. (1999). Revolution and evolution in twentieth-century macroeconomics. Conference paper: Frontiers of the Mind in the Twentieth-First Century, US Library of Congress, Washington DC.2 De Vroey, M. and P. Malgrange (2011). The History of Macroeconomics from Keynes’s General Theory to thePresent. IRES Discussion Papers 2011028.

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