a. Pi = Pie - 0.5(u - 0.06) Pi1 = Pi0 - 0.5(0.04 - 0.06) = 0.03 + 0.01 = 0.04

Period Pi Pie
1 0.04 0.03
2 0.05 0.04
3 0.06 0.05
4 0.07 0.06
5 0.08 0.07

b. Pi = Pie - 0.5(u - 0.06) Pi6 = Pi5 - 0.5(0.06 - 0.06) = 0.08

Period Pi Pie
6 0.08 0.08
7 0.08 0.08
8 0.08 0.08
9 0.08 0.08
10 0.08 0.08

No, because the unemployment rate is at the natural rate.

c. No, because people cannot continue to err in forming expectations according to Pie = P-1