Macroeconomic Issues:

Thus, the propensity to consume would not decrease with rising income, which was a concept contrary to the definition given by Keynes (Keynes 1936, 1997). Friedman (1953) further enlarged upon that concept with the notion that the ex post income described above by Hicks, would be the permanent income and that final income would not be related to any transient income, and that the transient income factors would not be related to one another. Friedman stated that Marshall described the component parts to this concept as, since real income was unaffected, one commodity substituted for another and that this idea became known as the "substitution effect." Also, when price declined so that consumer wealth increased (but money income was unaltered), this became known as the "income effect" (p. 64). Hicks (1939, 1991) brought in the notion of "inconsistent expectations" (p. 178) and it was eventually tied, in retrospect, by Samuelson (1948, 1995) to "rational expectations," which did far more than imply that, "because of rational expectations the government cannot fool the people with systematic economic policies" (p. 612). This essentially meant that if the public had a better understanding of economics and economic policies, that the government would not be able to goad the public into agreeing to some of the extant fiscal policies of central demand planning. Samuelson (1948, 1995) held that "Keynesian theories hold that many different forces affect aggregate demand, monetarists argue that changes in the money supply are the primary factor that determines output and price movements." He held the view that monetarist philosophy dictated that the actual supply of money in the economy prompted short term changes in the "nominal GDP" and that the money supply was the cause of price changes over the "long-run" (p. 605). The real, tangible result of monetarism was the belief that the use of monetary policy could be used to reduce the likelihood of a recession. If the management of the money supply could be used to reduce the possibility of a recession, and recessions eventually lead to a depression, then the implications of this concept were enormous with regard to the potential elimination of millions of dollars lost and the psycho-social implications and impacts brought on by depressions in general. This implied that the use of monetarism, through the use of monetary policy, could in theory be used to stave off a depression (p. 559).