The Early Incarnation e Think of an economy where inflation on average equals to zero, it is reasonable for people to expect that inflation rate will be equal to zero over the next year as well Assuming that j t=0 in equation(10. 1), then J t =(u+z)-au (102) e This is precisely the negative relation between unemployment and inflation The story behind it is simple Given expected prices, lower unemployment leads to higher nominal wages Higher nominal wages lead to higher prices 2003-7-20 52003-7-20 5 The Early Incarnation Think of an economy where inflation on average equals to zero, it is reasonable for people to expect that inflation rate will be equal to zero over the next year as well. Assuming that πt e =0 in equation (10.1), then πt = (μ+z) - αut (10.2) This is precisely the negative relation between unemployment and inflation. The story behind it is simple:Given expected prices, lower unemployment leads to higher nominal wages. Higher nominal wages lead to higher prices