Question

Philips Curve/Modified Philips Curve & Theta Relations?

I would like to know how theta affects the unemployment rate in philips curve. I have concluded the following situations: 1. When theta equals to zero, we get the original Phillips curve, a relation between the inflation rate and the unemployment rate; 2. When theta is positive, the inflation rate depends not only on the unemployment rate, but also on last year's inflation rate; 3. When theta equals to 1, we get a modified Philips curve, and the relation becomes that the unemployment rate affects not The Inflation Rate now, but rather the Change In Inflation Rate, high unemployment leads to decreasing inflation, and low unemployment leads to increasing inflation.

Now, my questions are: If there is an increase in theta, the inflation rate would be based on last year's inflation rate and the change in inflation is now increased right? What would it do to the unemployment rate then? Is it right to say now there would be a steady (instead of a direct) reduction in the unemployment rate, since now the change in inflation rate is increased? What about to the natural rate of unemployment? I saw that the formula only has Ut but does not have Un (natural rate of unemployment), so does it mean that it cannot be determined? Thanks!

Answer 1