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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 J. CABALLERO: OK, so let's continue with this IS-LM model. Remember in the previous lecture, we set up-- we set it up. We built the IS-LM model. And we'll go over that very quickly in this lecture because I think it's very important for you. And then, we're going to use it. And eventually, we're going to talk a little bit about the policy response, the macroeconomic policy response during the COVID-19 shock, or recession, all of the above. So the starting point-- remember, the first thing we did, we constructed the IS relation. And the IS relation was just the same as lecture 3. But we sort of spelled out what is inside that investment that we had taken as a constant there. We said, well, far more realistic is to make investment itself increasing in output because it's increasing in sales. That won't change the analysis that we had in lecture three. All that will do is change the slope of the aggregate ...

[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...