Macroeconomic Perspective: Individual households > Aggregate (Total) households Individual firms > Firms in Aggregate (Total) From household/consumer income > National Income From a focus on the price of individual products > to Overall Price Level From the demand for labor by indiv. Firms > to Total Employment

Major focus of Macroeconomics: What determines national income? What determines aggregate (total) demand and investment? What determines the overall price level?

Emergence of a macroeconomic perspective on economy-wide problems: The Great Depression Dominance of Neoclassical economic theory until early 1930’s Underlying theoretical assumption: The market economy is self-correction – recessions will cure themselves. Why? Recessions were caused by external factors – not by weaknesses in the economic system itself --- natural disasters, weather, etc. If too unemployment was high, there must be an excess supply of labor So the price of labor (wages) would fall and a new lower equilibrium wage would restore full employment. Believed policy intervention to restore equilibrium was therefore unnecessary.

Unemployment continued to rise and quickly reached double digits; It peaked at 25% by 1934. Neoclassical economic theory could not explain this. There were no solutions outside of the narrow theory maintaining self-correcting markets. New perspectives: Examined the dynamics of the economy overall and what drives aggregated demand and supply Looked at the position of participants in the economy – how could they stimulate aggregate demand, reduce unemployment and return the economy to full employment output. Consumers Businesses Rest of the World (exports) Government