Consider a modified aggregate supply function which takes account for the emergence of random business cycle shocks (+) with Ele] -0 in the sense that Yt + y + ₁ The loss function is the same as in exercise 1: L-(-k)²+(₁)² Notation: : random shock; Ele,] expected value of , b: constant parameter, all other variables see Exercise 1. aving considered the scenario above complete the following tasks: a) Derive the central bank's preferred inflation rate and explain. b) The result in a) reads as T₁ = b(k - ÿ) - 146 Explain the economic intuition of this result. c) Consider a more conservative central banker whose loss function is represented by

Consider a modified aggregate supply function which takes account for the emergence of random business cycle shocks (+) with Ele] -0 in the sense that Yt + y + ₁ The loss function is the same as in exercise 1: L-(-k)²+(₁)² Notation: : random shock; Ele,] expected value of , b: constant parameter, all other variables see Exercise 1. aving considered the scenario above complete the following tasks: a) Derive the central bank's preferred inflation rate and explain. b) The result in a) reads as T₁ = b(k - ÿ) - 146 Explain the economic intuition of this result. c) Consider a more conservative central banker whose loss function is represented by

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Exercise 1 Consider the following scenario. Aggregate output y at date t is specified as follows, Yt = Tt – T +ỹ where the trend level of output is represented by y. The central bank's loss function is captured by L 2 (y: – k)² +(T) 2 Where b> 0, and where k > 0 is a given parameter reflecting the normal level of aggregate production or the target level of output. The central bank takes the public's expectations as given. The society loss function is the same as the central bank loss function. Notation: y;: output/production; T: inflation rate; n: expected inflation rate; L: loss function; b, k: constant parameters; t: time index.
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Relating DSGE and AS/AD for a shock to government purchases: Consider thecomplete dynamic response of the economy to a temporary rise in governmentpurchases in the AS/AD framework.(a) Draw the AS/AD graph associated with this shock.
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