Lecture%2019 - Economics 102 Lecture 19: Disinflation...

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1 Economics 102 Lecture 19 : Disinflation LECTURE 19 DISINFLATION 1 Disinflation § At the beginning of the 1980s, the United States was experiencing double-digit inflation rates. § By the mid-1980s, the inflation rate had dropped to about 3%. What caused this significant disinflation? What were the real costs to the economy? LECTURE 19 DISINFLATION 2 In this lecture, look for the answers to these questions: § What is the short-run cost of reducing inflation? § Why were U.S. inflation and unemployment both so low in the 1990s?
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2 LECTURE 19 DISINFLATION 3 Inflation in the U.S. § When we consider the U.S. inflation record, two observations stand out: The rate of inflation was persistently high during the 1970s and early 1980s. The rate of inflation fell quickly in the 1980s and has remained relatively low since. § What explains these observations? LECTURE 19 DISINFLATION 4 Inflation in the U.S. -5 0 5 10 195 0 195 5 196 0 196 5 197 0 197 5 198 0 198 5 199 0 199 5 2000 Percent per Year CPI GDP deflator LECTURE 19 DISINFLATION 5 LRAS 1 Explaining Persistent High Inflation Over the long run, labor increases, capital accumulates and technology progresses, shifting LRAS to the right P Y AD 1 and growth in the money supply shifts AD to the right even faster. Y 1 P 1 Result: persistent inflation and growth in output.
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3 LECTURE 19 DISINFLATION 6 LRAS 1 Obtaining Zero Inflation Over the long run, labor increases, capital accumulates and technology progresses, shifting LRAS to the right. P Y AD 1 Now, suppose the growth in the money supply shifts AD to the right at the same rate. Y 1 P 1 Result: a constant price level; rate of inflation is zero. LECTURE 19 DISINFLATION 7 Reducing the Rate of Inflation § Disinflation : § To reduce inflation, The rate of growth of AD must This requires the Fed to § We will use the Phillips curve to help us think carefully about the consequences of a disinflationary monetary policy.
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This note was uploaded on 04/02/2008 for the course ECON 102 taught by Professor Rossana during the Fall '08 term at University of Michigan.

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Lecture%2019 - Economics 102 Lecture 19: Disinflation...

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