11 Consider three alternative policies, each with a different set of outcomes in terms of output and inflation, as shown in the following table:

Potential output is 500 in period 1 and rises 3 percent per year. The Fed’s objective function is where w 5 1, and the inflation target is 2.0 percent.

a Calculate the value of the objective function over the five-year period for each of the three policies.

b Which policy is best? Why? Which policy is worst?

c Would your answer to part b change if w 5 5? Explain.