Consider the following scenario.Aggregate output y at date t is specified as follows,Yt = T - nị +ỹwhere the trend level of output is represented by g.The central bank's loss function is captured byL= (- k)* +()Where b> 0, and where k > 0 is a given parameter reflecting the normal level ofaggregate production or the target level of output. The central bank takes the public'sexpectations as given. The society loss function is the same as the central bank lossfunction.Notation: y;: output/production; T: inflation rate; mf: expected inflation rate; L:loss function; 6, k: constant parameters; t: time index.Having considered the scenario above complete the following tasks:a) Explain the economic intuition behind the output function.b) Explain the components and the economic intuition of the lossfunction. Why is it quadratic?c) Derive the central banks preferred inflation rate and provide anexplanation.d) Derive the socially optimal inflation rate and explain.

Output Equation in the economy - yt = πt - πte + y⏜ Where πt = Actual inflation rate , πte =…

Consider the following scenario. Aggregate output y at date t is specified as follows, where the trend level of output is represented by g. The central bank's loss function is captured by Where b> 0, and where k > 0 is a given parameter reflecting the normal level of aggregate production or the target level of output. The central bank takes the public's expectations as given. The society loss function is the same as the central bank loss function. Notation tinroducti nflation rate BYpecter flation rate T

Consider the following scenario. Aggregate output y at date t is specified as follows, where the trend level of output is represented by g. The central bank's loss function is captured by Where b> 0, and where k > 0 is a given parameter reflecting the normal level of aggregate production or the target level of output. The central bank takes the public's expectations as given. The society loss function is the same as the central bank loss function. Notation tinroducti nflation rate BYpecter flation rate T

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter20: Monetary Policy

Section20.A: Policy Disputes Using The Self Correcting Aggregate Demand And Supply Model

Problem 3SQP

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