The actual price level Pt is stochastic (of course, since it depends on the stochastic supply shock Ut ). By substituting (3.10) into (3.6), the expression for Pt is obtained:

Pt =

ao – bo ( 1 =i)-(1)ut, al + bl k al ) ai

(3.11)

where P (ao – bo)/(ai + b1) is the equilibrium price that would obtain if there were no stochastic elements in the market. Equation (3.11) says that the actual price Pt fluctuates randomly around P. The expectational error is equal to Pt – Et-iPt =

–(1/ai )Ut , and exhibits no predictable pattern. Also, the average of this error is zero, so that agents do not make systematic mistakes. If there is an expected negative