Assume that expected inflation is based on the following: πet = θπt-1. If θ = 0, we know that
1.a reduction in the unemployment rate will have no effect on inflation.
2.low rates of unemployment will cause steadily increasing rates of inflation.
3.high rates of unemployment will cause steadily declining rates of inflation.
4.the Phillips curve illustrates the relationship between the level of inflation rate and the level of the unemployment rate.
which one is correct?
