Question: Q8. We have the loss function and the Phillips curve: =12 +and=1 ()+ 2 The policymaker can see the cost-push shock and react to it.

Q8. We have the loss function and the Phillips curve:

=12 +and=1 ()+ 2

The policymaker can see the cost-push shock and react to it.

  1. a)Use the Philips curve to substitute for inflation in the loss function and calculate the inflation rate that minimizes the loss function.
  2. b)How does this inflation rate depend on parameters and a?
  3. c)Does the policymaker stabilize cost push shocks in this case?

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