Microeconomics has Four Big Truths That We Must Ignore

Context: Key propositions related to macroeconomics are enough to elevate macro-economic into the realm of the essential.

Key things to know about macroeconomics: based on Keynesian economics

• Impact of a demand shock on output and employment: A strong negative shock to demand—a sudden decline, usually leads to a loss of output and employment.
• Keeping nominal wages low is sticky (due to sociological reasons), and so employers do not lower wages with demands but resort to lay-offs (loss of employment).
• It was true in the Great Depression, in the disinflation of the 1970s and 80s, and in the financial crisis following 2008.
• Role of Central banks: which can offset demand shocks or even prevent them by engaging in complex financial transactions or simply print more currency to stabilize nominal demand.
• Increased money supply leads to inflation: if central banks go crazy increasing money supply, the result will be high price inflation
• Exception of it was in 2008 and 2009 when the US Federal Reserve paid interest on bank reserves. (decreasing the velocity of money)
• Impact of Large non-monetary (rise in oil prices): can lead to depression or recession; Central banks can partially stabilize such shocks, but they cannot erase them.
• Growing population is good for the economy: with other things held constant.
• On government borrowings: high-return public investments will strengthen a country’s fiscal situation, even if financed by government borrowings.