Hi, this question relates to Chapter 3 & 4 from Carlin and Soskice; Macroeconomics: Institutions, Instability, and the Financial System.

2. (6 Marks) Consider IS-PC-MR model with adaptive expectations. Suppose that the central bank minimized the following loss function L = (yt - ye)2 + ( It - 7]) 2, subject to the Phillips curve Tit = Tit-1+ (yt - ye), where ye = 4, and 7/= 2. Suppose that in Time 0, in addition to inflation targeting, the CB starts targeting output yr = 6. The highest level of output this economy will reach during the transition to the new equilibrium is (a). -. The magnitude of the inflation bias is . (b)_ - percent