Qn 3 pls

Consider the following problem, based on a simplified version of Poole (1970), (William Poole, 1970. Optimal choice of monetary policy instruments in a simple stochastic macro model, Quarterly Journal of Economics 84, 197-216): Yo aiy + Uy (1) mo + by ciy + vy (2) Yt me where wu; and v, are independent random variables (i.e., Cov(u,v) = 0), with zero mean and variances, o2 and o2, respectively. yo and mg are constant terms in these two equations respectively. Assume that the central bank wants to minimize the loss function, L:=E()" (3) 1. Explain these equations [6 marks; 2. Find analytically the minimum loss obtainable under an interest rate tar- geting regime [22 marks; 3. Find analytically the minimum loss obtainable under a monetary targeting regime [22 marks|