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[SQUEAKING] [RUSTLING] [CLICKING] RICARDO CABALLERO: So today I'm going to talk about the Phillips curve and inflation. Now as I said in the previous lecture, the material that is specific to this lecture will not enter this quiz. It's the beginning of what is perhaps the most important model you'll see in this class, but it will take us three or four lectures to develop. So I'm going to say things that certainly will-- may help you understand a little better the previous lecture, so if you're only concerned about the next quiz, there will be a sort of small review of the previous lecture here. But again, anything that is specific to this lecture and was not in the previous one won't be part of this quiz. So what is this Phillips curve? Well, in 1958, an economist at LSE, London School of Economics, came out with just an empirical relationship. This is AW Phillips found that using historical data for the US, I think he did, there was a negative rel...

[SQUEAKING] [RUSTLING] [CLICKING] RICARDO CABALLERO: But before I do that, before I get into the IS-LM model, let me spend a little time telling you what is going on in the US economy, as this will relate to the kind of things that we'll discuss later in this lecture. So what you see there is the path of net worth, so wealth, essentially, of households and nonprofit organizations, households primarily in the US. And what you can see is that there is a more or less steady trend. Obviously, in recessions, net wealth tends to decline. And certainly, early on in the COVID recession, it declined very dramatically, because the price of equity, the price of houses, everything declined with the initial shock. But what you see after that is a dramatic rise in wealth in the US, and all around the world, but particularly, in the US. And what is behind that, well, there are two things that are behind that, but the main one is asset prices. You have massive rallies in the equity m...

[SQUEAKING] [RUSTLING] [CLICKING] RICARDO CABALLERO: Today, we're going to talk about a very important topic in economics, which is expectations. We have barely mentioned expectations when we talk about the Phillips curve, we talked about expectations when we discussed the UIP and so on, but expectation is a much bigger issue in economics. In fact, most decisions by firms, by consumers, governments involve considerations of the future. And it plays an even bigger role in finance in which essentially, everything is about the future. The price of an asset today is meaningless in itself. You have to compare it with what you expect to get out of that asset in the future. So it's all about expectations and so on. So that's what we're going to do today we're going to talk about expectations, how to value things that you expect to receive in the future, and how to compare those things with things that you have in the present. But before doing that, actually, ...