Theoretical Macroeconomics and the Financial Crisis

Ben Friedman Toronto

Macroeconomists study the economy as a whole, considering the interactions between many different sectors of the economy, including business and labor. Macroeconomists are also interested in how governments can best intervene when economic conditions deteriorate. Unlike other economists who focus primarily on banking, macroeconomics is broad in scope and can include topics like unemployment, inflation, and interest rates.

Macroeconomics is an integral part of understanding how the global financial system operates and what’s at stake if it fails. To learn more about macroeconomists, read this article written by¬†Ben Friedman Toronto, one of the top macroeconomic experts out there today.

Theoretical Macroeconomics and the Financial Crisis

The financial crisis that erupted in 2008 and continues to this day has led many to question the theoretical underpinnings of macroeconomics. While macroeconomists may explain why such a crisis occurred, they will have a hard time explaining how it happened in the first place. The crash of the U.S. housing market, for example, demonstrated how things could go wrong when bubbles form in the economy. In other words, what caused the bubble? And why did it burst so quickly?

In addition to these questions, we also need to understand why economic models built on these theories failed so miserably when confronted with reality. After all, these models were supposed to predict how economies change over time and help us understand what drives them forward or back. Because of their limitations in predicting real-world events and their inability to explain all of them with ease, many economists have begun questioning whether it is wise to continue using theories that have been proven to be so flawed.

Ben Friedman Toronto

While the financial crisis has led many to question the usefulness of mainstream macroeconomics, it is essential to remember that many economists still believe in these theories. These researchers believe that they can still be helpful as long as they are accompanied by a more relational approach to economic theory and a greater emphasis on empirical research. They are, in fact, the reason that mainstream economists are still using these theories.

To make a profit, a business must take advantage of the differences between supply and demand. If it can produce more goods than consumers want at lower prices than those demanded by consumers, it will make money. If it can have fewer goods than consumers want at prices above what consumers are willing to pay for it, it will lose money. In neoclassical economics, this is referred to as the law of supply and demand; in other words, the law of supply and demand. It is a law that is supposed to be unassailable and taught for centuries.