2 Consider a central banker who aims to maximise social welfare, given by V = $(y...

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2 Consider a central banker who aims to maximise social welfare, given by V = $(y -y") - 12/2/ subject to the Phillips curve yt = y^ + a (Tt - Et17) +t 1 Where yt is output, , is inflation and E, denotes the rational expectations operator conditional on information up to, and including, period t. et is an exogenous shock while y" is a constant. (b) Solve for the equilibrium levels of output and inflation assuming that the policy maker operates under discretion and briefly comment on your results, including how the volatility of shock impacts the loss function. (30 marks) 2 Consider a central banker who aims to maximise social welfare, given by V = $(y -y") - 12/2/ subject to the Phillips curve yt = y^ + a (Tt - Et17) +t 1 Where yt is output, , is inflation and E, denotes the rational expectations operator conditional on information up to, and including, period t. et is an exogenous shock while y" is a constant. (b) Solve for the equilibrium levels of output and inflation assuming that the policy maker operates under discretion and briefly comment on your results, including how the volatility of shock impacts the loss function. (30 marks)

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The central bankers objective is to maximize social welfare which is represented by the following ut... View the full answer