Econ110BW11 - Lec 23 A - GRol

Econ110BW11 - Lec 23 A - GRol - Macroeconomics B Econ 110B...

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Macroeconomics B Econ 110B, Winter 2011 Prof. Giacomo Rondina Lecture 23
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Announcements Reminder: CAPE online evaluations. roblem Set 7: will be posted later today solutions next Wed Problem Set 7: will be posted later today, solutions next Wed 2 Depressions and Slumps (Ch. 22)
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When things go really wrong: Depressions and Slumps 3 Depressions and Slumps (Ch. 22)
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When things go really wrong: Depressions and Slumps The Great Depression (1929 1933) The Japanese Slump (1990 2004) The Great Recession (2008 2010) 4 Depressions and Slumps (Ch. 22)
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Depressions and Slumps: the birth of Macroeconomics S&P Composite Index: 1920 1950 5 Depressions and Slumps (Ch. 22)
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Depressions and Slumps: the birth of Macroeconomics US Unemployment Rate 6 Depressions and Slumps (Ch. 22)
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Depressions and Slumps ¾ Disinflation, Deflation and Liquidity Trap ± Automatic Stabilizer ± What can go wrong? flation xpectations eflationary pectations) o Inflation Expectations (Deflationary Expectations) o Liquidity Trap o Deflation – Liquidity Trap Spiral 7 Depressions and Slumps (Ch. 22)
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Depressions and Slumps ± Automatic Stabilizer i LM ² equilibrium is at output below the natural rate ( Y 0 <Y N ) LM’ LM’’ i 0 ² when Y 0 <Y N unemployment rate is above natural rate, u 0 >u N ² when u 0 >u N inflation slows down hilli C) th t i i fl ti ) M/P IS (Phillips Curve) so that π t < π t-1 ( disinflation) ² disinflation affects real money growth. Suppose that, initially, g m - π = 0, so that /P is constant When en Y Y 0 Y N M/P is constant. When π then g m - π > 0 and so M/P . Therefore LM shifts right. ² stabilization process stops when Y=Y N . 8 Depressions and Slumps (Ch. 22)
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Depressions and Slumps ± Automatic Stabilizer i LM ² equilibrium is at output below the natural rate ( Y 0 <Y N ) LM’ LM’’ i 0 ² when Y 0 <Y N unemployment rate is above natural rate, u 0 >u N ² when u 0 >u N inflation slows down hilli C) th t i i fl ti ) M/P IS (Phillips Curve) so that π t < π t-1 ( disinflation) ² disinflation affects real money growth. Suppose that, initially, g m - π = 0, so that /P is constant When en Y Y 0 Y N M/P is constant. When π then g m - π > 0 and so M/P . Therefore LM shifts right. ² stabilization process stops when Y=Y N . ¾ automatic mechanism can break down in two cases 1. Deflationary Expectations quidity Trap 9 Depressions and Slumps (Ch. 22) 2. Liquidity Trap
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Depressions and Slumps ± Automatic Stabilizer Breakdown: ¾ Deflationary Expectations i LM ² previous argument kept expected inflation constant as π LM’ LM’’ i 0 ² when π ( disinflation) it is possible that π e ² if this happens the IS will shift left π e M/P IS (downward) ² output will not recover as fast as before Y Y 0 Y N IS IS’’ Y 1 Y 2 10 Depressions and Slumps (Ch. 22)
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Depressions and Slumps ± Automatic Stabilizer Breakdown: ¾ Deflationary Expectations i LM ² previous argument kept expected inflation constant as π LM’ LM’’ i 0 ² when π ( disinflation) it is possible that π e ² if this happens the IS will shift left M/P IS (downward) ²
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Econ110BW11 - Lec 23 A - GRol - Macroeconomics B Econ 110B...

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