e With a few manipulation, this relation can be rewritten as a relation between the inflation rate, the expected inflation rate, and the unemployment rate e+(u+z)-au 10.1) Where J. denotes the inflation rate and e denotes the corresponding expected inflation rate e In short, equation(10. 1) tells us Higher expected inflation leads to higher inflation Given expected inflation, the higher the markup chosen by firms, u, or the higher the factors that affect wage determination, Z, the higher inflation Given expected inflation, the higher unemployment, the lower inflation 2003-7-20 32003-7-20 3 With a few manipulation, this relation can be rewritten as a relation between the inflation rate, the expected inflation rate, and the unemployment rate πt =πt e + (μ+z) - αut (10.1) Where πt denotes the inflation rate, and πt e denotes the corresponding expected inflation rate. In short, equation (10.1) tells us: ⚫ Higher expected inflation leads to higher inflation ⚫ Given expected inflation, the higher the markup chosen by firms, μ, or the higher the factors that affect wage determination, z, the higher inflation. ⚫ Given expected inflation, the higher unemployment, the lower inflation