KEY EQUATION

π = π^s — h( è — u) (12.1)

The expectations-augmented Phillips curve states that unanticipated inflation, π — π^e, is negatively related to cyclical unemployment, u — U. The expectations-aug­mented Phillips curve also implies that inflation, π, is negatively related to unemployment, u, only if the expected inflation rate, π^e, and the natural unemployment rate, U, are constant. Changes in the expected inflation rate or in the natural unemployment rate cause the relationship between inflation and unemployment—the short-run Phillips curve—to shift.

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