Question: 1.Explain what is meant by the central bank's loss function. How are the central bank's preferences reflected in the loss function? Draw the loss 'circles'

1.Explain what is meant by the central bank's loss function. How are the central bank's preferences reflected in the loss function? Draw the loss 'circles' for the cases where

(a)=1

(b)<1

(c)>1

In which of the three cases will the central bank reduce inflation back to target quickest after an inflation shock? Is there any downside to adopting this policy stance?

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