UCLA ECON

Consider IS-PC-MR model with adaptive expectations. Suppose that the central bank minimized the following loss function (Yt-yo)2 + (1 - 11)2, subject to the Phillips curve r= Tt-1 + (yt ye) where yer 6, and TTT= 4. Derive CB's monetary rule. Suppose in time 0, in addition to inflation targeting the CB starts targeting output yH= 8. What is the CB's new monetary rule? What is the level of inflation and output in time 0, time 1, time 2? What is the magnitude of the inflation bias? Consider IS-PC-MR model with adaptive expectations. Suppose that the central bank minimized the following loss function (Yt-yo)2 + (1 - 11)2, subject to the Phillips curve r= Tt-1 + (yt ye) where yer 6, and TTT= 4. Derive CB's monetary rule. Suppose in time 0, in addition to inflation targeting the CB starts targeting output yH= 8. What is the CB's new monetary rule? What is the level of inflation and output in time 0, time 1, time 2? What is the magnitude of the inflation bias