Agents Response Update Expectation s Find Rational Expectation (Fixed Point Problem) E d +Tt +Er 1+b u The Consequent equilibrium Inflation becomes u t O 1+6 Note that this time consistent solution is inferior to the solution 复9大学经学院 with zero inflation commitment. 3Agents’ Response: Update Expectation ❖ Find Rational Expectation (Fixed Point Problem): u e t   1  = −         + − + + −  = −      1 1 1 t e t t e t t t u E E • The Consequent Equilibrium Inflation becomes t u  t    + = − + 1 1 1 • Note that this time consistent solution is inferior to the solution with zero inflation commitment