3. The text proposes the following model of expected inflation = (1 ) + 1

a) Describe the process of the formation of expected inflation where = 0

b) Describe the process of the formation of expected inflation where = 1

c) Suppose that the Phillips curve is given by = + 0.1 2 What is the natural rate of unemployment for this economy?

d) In addition, suppose that = 1. Assume inflation in t-1 is zero. Suppose also that in year t, the central bank decides to keep the unemployment rate at 4% forever. Compute the rate of inflation for years t, t+1, and t+2