the Expectations Augmented Phillips Curve (henceforth EAPC), can be written as: π t = πt (Expected) − q (Ut – U*) + error term, with q > 0 where U is the current unemployment rate, U* is the natural rate (assumed constant here), small t denotes period, and q denotes the response of inflation to the unemployment rate, i.e., the slope of the short-run Phillips curve. By taking expected inflation to the left hand side of the EAPC we get: πt − πt (Expected) = q(U*) − q(Ut) If πt (Expected) = πt–1, i.e., expected inflation is equal to last period’s inflation, then Dπ = q(U*) − q(Ut) = zero.
