Econ 2133 1st Edition Lecture 181st Class of 2 the last exam is onCurrent LectureFinal Section of Course – Macro History since 1960Graph 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 demandThese 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 increaseSo 17%/ year wage increase25% inflation built in 15% T-bill rate; incredibly expensive. So they fell to 13% then 11% as callable debtMoney 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 overin 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