For questions 2--5, consider the simplified model of time inconsistency discussed in the lecture. The government minimizes the loss function A = (y-y*)² - + + a(π – π*)², where a > 0, y* is potential output and * is the inflation target. Supply is given by the supply function y = y + b(n − π²), where is the expected inflation rate and y is the long-run output level with y < y*. Mark the correct statements on the intuition for the loss function. Assume that 0 < a < 2. The fact that the constant term a, multiplying the squared deviation of inflation from its optimal level, is smaller than the constant deviation of output from potential output implies that there is less weight in the loss function on deviations of inflation from its target. Assume that 0 < a < 2. The fact that the constant terma, multiplying the squared deviation of inflation from its optimal level, is smaller than the constant in front of the squared in front of the squared
For questions 2--5, consider the simplified model of time inconsistency discussed in the lecture. The government minimizes the loss function A = (y-y*)² - + + a(π – π*)², where a > 0, y* is potential output and * is the inflation target. Supply is given by the supply function y = y + b(n − π²), where is the expected inflation rate and y is the long-run output level with y < y*. Mark the correct statements on the intuition for the loss function. Assume that 0 < a < 2. The fact that the constant term a, multiplying the squared deviation of inflation from its optimal level, is smaller than the constant deviation of output from potential output implies that there is less weight in the loss function on deviations of inflation from its target. Assume that 0 < a < 2. The fact that the constant terma, multiplying the squared deviation of inflation from its optimal level, is smaller than the constant in front of the squared in front of the squared
Chapter17: The Philips Curve And Expetactions Theory
Section: Chapter Questions
Problem 12SQ
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Transcribed Image Text:For questions 2--5, consider the simplified model of time inconsistency discussed in the lecture. The government minimizes the loss function
A = (y-y*)² + a(π − ^*)², where a > 0, y* is potential output and * is the inflation target. Supply is given by the supply function y = y + b(n − nª ),
where is the expected inflation rate and y is the long-run output level with y < y*.
Mark the correct statements on the intuition for the loss function.
in front of the squared
Assume that 0 < a < 2. The fact that the constant term a, multiplying the squared deviation of inflation from its optimal level, is smaller than the constanti
deviation of output from potential output implies that there is less weight in the loss function on deviations of inflation from its target.
Assume that 0 < a < 2. The fact that the constant terma, multiplying the squared deviation of inflation from its optimal level, is smaller than the constant in front of the squared
deviation of output from potential output implies that there is more weight in the loss function on deviations of inflation from its target.
Part of the objective of the government is to minimize deviations of inflation from inflation expectations.
O Part of the objective of the government is to minimize deviations of inflation from the inflation target.
Part of the objective of the government is to increase deviations of unemployment from the natural level of unemployment.
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