Econ 2133 1st Edition Lecture 18 st 1 Class of 2 the last exam is on Current Lecture Final Section of Course Macro History since 1960 Graph with downward sloping curve depicts tradeoff between inflation and unemployment Can lower one as long as you re willing to raise the other Curve called the Philips curve because he came up with the idea Freidman and Phelps declared the curve was instable and going to shift because you can get people to do different things at different inflation rates 1 v 6 When 6 inflation persists then people s inflation expectations change demand These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute 1979 inflation 14 prime interest rate rate to loan to least risky customers 21 Union wage demand 15 Per year 3 years 2 real inflation increase So 17 year wage increase 25 inflation built in 15 T bill rate incredibly expensive So they fell to 13 then 11 as callable debt Money doubles every 5 years at 15 rate compound interest Greatest monetary economist in the world who is still currently alive wrote about disinflation of the 1980s Treasury issued debt in foreign currencies in 1979 1970s inflation 1980s disinflation policy of fed and Regan administration from moment Walker took over in 1979 1970s inflation and bad macroeconomic outcomes 1980s Price stability 1990s Price stability No more 1930s and no more 1970s Ms went down by 33 in 1930s Ms increased so therefore inflation increased What we learned BIG inflation implies BIG recessions therefore don t have big inflation history demonstrations that ALL inflations throughout human history end badly Recession in 80s result in necessary disinflation Ending inflation took major recession 1970s Fed followed a federal funds rate targeting monetary policy regime Interest rate stability financial market stability stabilizes banking investment Inflation require fed to apply upward pressure on money supply which then puts upward pressure on inflation rate 1979 your prime interest rate is 21 ew August of 1979 Paul Volker becomes chair of the Fed October of 1979 Money Stock targeting fiscal policy regime was switched to out of necessity Don t target interest rates leave them alone hadn t worked out so well INSTEAD target growth of m1 and m2 money supplies Monetary growth targeting was is an inflation buster Growth rate of the money supply is the life blood of inflation take it away and inflation dies Ms x Constant V Pirce x constant Q any changes in Ms are directly related to changes in Price by same amount Increase Ms by 1000 will get 1000 change in Price and therefore inflation STOP Ms you STOP inflation
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