Macroeconomic Theory Essay

Whither the Microeconomic Foundations of Macroeconomic Theory?
Introduction
The ubiquitous DSGE line of research had been a core area of focus even before the economic crunch and crisis. The economic crisis brought with it major concerns from people in all classes and sorts of life including the Nobel Laureates. They mainly pose disapproval and anxieties about the ruling research paradigm in all cases of micro and macroeconomics. Before the 2007-2009 crisis, the major microeconomic model that was used was the Keynesian-neoclassical synthesis. The economists at the time believed that the free market economy needed continuous stabilization and regulation to achieve an acceptable equilibrium. On the other hand, other economists like Cassel and Walras believed in the general equilibrium (GE) in which they examined conditions favorable for maintaining a competitive balance. The models examined using the GE notion came to be known as the Arrow-Debra. Another model that can help understand economic trends is the new-Keynesian DSGE model. The framework states that money is either absent or is introduced virtually by the currency in the utility function. It assumes a closed economy and employs labor as the only primary factor. The structure has

The first fault in the use of the paradigm is the representative agent. The defect limits one from using aggregate demand functions appropriately even if one needs to build the functions from the rational individual households. Another major flaw in the microeconomics is rational expectations. Expectations such as complete markets and market clearing coincide with the mathematical expectations of a true and rational model of economy hence making it hard to understand and track the major economic functions. A good market model requires that all goods and services must have buyers. The consumers balance the market economy bringing an