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Inflation and Output

Inflation and Output

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Published by: helperforeu on Nov 21, 2009
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 Inflation and Output 
Jenny Xu, Department of Economics, SFU
chapter 15
The Economy in the Short Run
Principles of Macroeconomics, 2nd Canadian EditionSlide 15-2Copyright © 2005 McGraw-Hill Ryerson Limited
Volcker’s Disinflation
In the late 1970s, inflation increased rapidly
By 1979 US inflation = 11.3%; Canada = 9.2%
Paul Volcker was appointed the Chairman of the USFederal Reserve in Sept. 1979
sharply increased interest rates
GDP & employment fell sharply in the U.S.
U.S. slowdown decreased demand for Canadianexports
Bank of Canada followed US lead in raising interestrates
Interest rates doubled – 1978 = 8.6%; 1981 = 17.8%
Sharpest recession since the 1930s followed
Unemployment rate in 1980 = 7.5%; in 1983 = 11.9%
Principles of Macroeconomics, 2nd Canadian EditionSlide 15-3Copyright © 2005 McGraw-Hill Ryerson Limited
Why? Extending the Basic Keynesian and
 This chapter extends the basic Keynesian and
models to allow for price inflation and thereactions of Central Banks
We use the aggregate demand-inflationadjustment diagram to analyze the recessions of the early 1980s & 1990s

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