The importance of expectation e Suppose expectations are formed according to e=0 t-1 (103) e To see the implications of different values of e for the relation between inflation and unemployment, replace equation(10.3)in equation/ (10.1). Doing so gives 丌e t1+(u+Z) )-u o When e equals zero, we get the original Phillips curve When e is positive, the inflation rate depends not only on the employment rate but also on last year's inflation rate C To continue 2003-7-20 82003-7-20 8 The importance of expectation Suppose expectations are formed according to πt e =θπt-1 (10.3) To see the implications of different values ofθfor the relation between inflation and unemployment, replace equation (10.3) in equation (10.1). Doing so gives πt e πt = θπt-1 + (μ+z) – αut ⚫ When θ equals zero, we get the original Phillips curve. ⚫ When θ is positive, the inflation rate depends not only on the employment rate but also on last year’s inflation rate. To continue