2. (i) Explain the central bank's loss function and how are the central bank's preferences reflected in the loss function? [3]

(ii) Assuming = = 1 in the Loss function and the Phillips curve, derive the MR curve graphically and explain the economic intuition behind the process. [7]

(iii) Using the 3-equation model, provide a detailed period by period analysis of the adjustment process for the case where the economy is hit by a permanent positive aggregate demand shock. [15]