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okay this video is about temporary
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negative aggregate demand shock
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so first we have to start with
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medium round equilibrium
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so we assume that output is equal to
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potential
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output y
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and okay for this level of output uh
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the corresponding level of interest rate
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is here r
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as closer here are
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us okay looks fine
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so here we have
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and
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and in period zero
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we assume that expected level of
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inflation is inflation
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so here we are here with y
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okay so initial point
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is point a
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however then in period zero
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we have temporary negative algorithm
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demand shock
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which means that ios curve is gonna
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shift to the left
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for for one period
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[Music]
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okay
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okay so let's have it here
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so this new is
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assuming that interest rate is the same
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we have a new level of output
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y0 and for this level of output
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the corresponding rate of inflation is
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by
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zero maybe i will do it in different
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ways so for this point
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here we have zero
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okay so we will end up here so in period
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zero we move from point a
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to point b
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[Applause]
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we end up with y zero y
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zero and in order to define our zero
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first we have to predict
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the shape of phillips curve in the next
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period
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so for pi zero here it is
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[Music]
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okay
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so we predict philips curve in here
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[Applause]
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and for our
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uh will be equal to
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inflation in period zero
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and previous zero inflation decreased in
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comparison
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to what was initially in equilibrium
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so yeah you know basically we know it's
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gonna shut down
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so in period one this will be the
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optimal point of the central bank
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point c on the intercept of new phillips
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curve
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and monetary rule and in order to
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achieve
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this point in period one central bank
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will have to charge r zero
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so again this is temporary shock so when
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analyzing period one central bank
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already keeps
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in mind that economy is gonna get back
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to this
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initial is infinite one so fine
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here we are so this is everything
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what happens in period zero in period
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one
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uh economy actually moves from b
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to c so this
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interest rate finally works because
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there was one period left
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as you remember so we
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will end up this period with
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[Music]
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one
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so in order to define r1 first we have
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to predict phillips curve
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in the next period so
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again as you remember
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was p0 with the communication in period
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one
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p1 is expected rate of completion
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in period two so p
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one is greater than sorry pi
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1 is greater than pi zero so for the
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next period you know this phillips curve
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is gonna be located
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above the original phillips curve in
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period one
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just because expected level of inflation
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affects the value of intercept
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so here we have it pc
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two so for this level for this phillips
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curve
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um you know
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for the central bank the optimal point
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will be point
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d and in order to
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be located on this point central bank
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will have to charge
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r one so we end up period one with
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five one y one and
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r one
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[Applause]
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so starting from the second period um
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so we shift from point
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from point c to point d
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and starting from this period you know
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we will shift closer and closer
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to the initial point so a
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is at the same time like initial point
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and at the same time
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you know final point when economy will
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end up in the new medium run equilibrium
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since we assume
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that food is curve will be here
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only for one period period zero
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then we will get back to the initial
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level of interest rate
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so again let's analyze it using response
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[Music]
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functions
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[Music]
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zero
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here we have period 1
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so for output initial value was
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potential
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output y e then in period 0
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it decreased to y0
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and then it increased to 1 1.
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okay
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and then it was slowly decreasing to the
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initial level
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of something like this i do not like the
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shape but you got the idea
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okay for inflation initially it was in
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python
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the value was quite low until period
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zero
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then it decreased to pi zero
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and then it will slowly increasing
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until it reached the initial level for
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interest rate we started with
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our s then
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rs decreased to r0 in period
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0 and then it was slowly
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increasing until it reached the initial
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level
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okay so that's it for this graph and
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thank you for watching