Consider the following model of expected inflation:

(c) Consider the following model of expected inflation: ii. iii. (1 9 + 91Tt_1 What do we know about your process of the formation of expected inflation when 9 = 0. What do we know about your process of the formation of expected inflation when 9 = 1. Suppose that the Phillips curve is given by: ITt = IT/ + (m + z) crut where = (1 9)1 + 91Tt_1. Also suppose that m 2%, z = 5%, a 0.7 and 9 1. Given this information, write out the equation for the change in the inflation rate as a function of the unemployment rate. [Hint: write out the equation and substitute in the information given. Do not include the percent sign In your equation]. (d) Suppose the Phillips curve IS given by: ITt = 0.08 + 0.1t 2ut Where is the markup of prices over wages. Suppose that is initially equal to 20%, but that as a result of a sharp increase In oil prices, increases to 40% in year t and thereafter. i. Why would an increase In oil prices result in an Increase in P? ii. What is the effect of the increase In on the natural rate of unemployment?