The first shock was an aggregate demand shock, the second shock was an aggregate supply shock. A demand shock causes output and prices to move in the same direction initially, but the final result is a movement in prices only. A supply shock causes prices and output to move in opposite directions. The changes in output and prices are long lasting. Based on the above answers, we would expect a positive effect on output, a negative effect on unemployment, an ambiguous effect on the interest rate, and an increase in investment.
Prices rise in the medium run when the demand shock dominates.
This overshooting does not occur when the supply shock dominates and prices fall. Theta equal to zero means that the expected inflation rate is zero each year. This does not change the natural rate of unemployment. Now the expected inflation rate is last year's inflation rate. But inflation is consistently increasing, so this is not a rational way to form expectations anymore.