Please read the question carefully and answer the question step by step.

1. Demand. The demand for real goods and services is given by the following IS equation: 9 = 2 _ 'I' + 6' (1) where y denotes the output gap, 1' denotes the real interest rate, and e is an exogenous demand shock with a mean of zero. By assumption, the central bank can set 1" directly. All interest and ination rates are expressed in percentages. That is, if the real interest rate is two percent, then r = 2. (a) Suppose that the central bank has an ination target of WT = 2.5. Compute the loss L to the central bank when the actual ination rate is 0, 1, 2.5, and 3. You don't have to show your work. (b) When WT = 2.5, what is the value of 71' that minimizes the central bank's loss function given in equation (3)? You don't have to show your work