The Global Financial Crisis and Undergraduate Macroeconomics

Abstract

The Global Financial Crisis (GFC) of 2008 and 2009 was the deepest global cyclical downturn since the Great Depression of 1929-1933. Historically, major worldwide economic events have influenced economic thought and this has been reflected in the economics curriculum. For example, the Great Depression ushered in Keynesian economics; and the oil price shocks of the 1970s contributed to stagflation,1 which led to recognition of the role of aggregate supply and expectations through the expectations-augmented Phillips curve. The GFC and its aftermath have already challenged established thought in some areas of macroeconomics, which has implications for undergraduate macroeconomics. A proper understanding of the causes and effects of the GFC must draw on some ideas that do not normally feature in undergraduate macroeconomics subjects and must pull together strands from other economics subjects as well as subjects from the disciplines of accounting and finance. This article first explains that debt and asset prices can be integrated into the standard aggregate demand (AD)-aggregate supply (AS) model and discusses the importance of understanding the relationship between equity, assets and liabilities. This is followed by a brief discussion of the implications of the GFC for monetary and fiscal policy.