Assume That Expected Inflation Is Based on the Following: πᵉT

question 7

Multiple Choice

Assume that expected inflation is based on the following: πᵉt = θπt₋₁. If θ = 1,we know that

• A)a reduction in the unemployment rate will have no effect on inflation.
• B)low rates of unemployment will cause steadily increasing rates of inflation.
• C)the actual unemployment rate will not deviate from the natural rate of unemployment.
• D)the Phillips curve illustrates the relationship between the level of inflation rate and the level of the unemployment rate.

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