ation (1) represents the equilibrium in the goods market, equation conomy, and equation (3) is the Central Bank's loss function. Y is and are actual and target inflation, respectively; x and 3 are 's credibility and inflation aversion respectively. X Yt = At-art-1 πt = [xπ² + (1 − x)πt−1] + 0.5(Yt — Ye) L = (yt − Ye)² + ß(πt − π¹)² 2 T T For X For X and 3 for Economy A are x = 0.8 and 3 = 1. and 3 for Economy B are x = 0.5 and 3 = 1.5.
ation (1) represents the equilibrium in the goods market, equation conomy, and equation (3) is the Central Bank's loss function. Y is and are actual and target inflation, respectively; x and 3 are 's credibility and inflation aversion respectively. X Yt = At-art-1 πt = [xπ² + (1 − x)πt−1] + 0.5(Yt — Ye) L = (yt − Ye)² + ß(πt − π¹)² 2 T T For X For X and 3 for Economy A are x = 0.8 and 3 = 1. and 3 for Economy B are x = 0.5 and 3 = 1.5.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
(a) Derive the central banks’ best response for both economies.
(b) Represent these economies in a graph and explain how the central banks would respond
to a positive temporary aggregate demand shock, emphasising the key difffferences
between the two economies. (250 words max )
![Consider two economies (A and B) both characterised by the following equations:
Yt = At art-1
πt = [Xπ² + (1 − x)πt−1] + 0.5(Yt — Ye)
L = (Yt − Ye)² + ß(πt − π¹)²
in which equation (1) represents the equilibrium in the goods market, equation (2) the supply
side of the economy, and equation (3) is the Central Bank's loss function. y is output; r is
policy rate; and π are actual and target inflation, respectively; x and ß are parameters for
central bank's credibility and inflation aversion respectively.
=
The values for and for Economy A are x
X
0.8 and 3 = 1.
The values for x and 3 for Economy B are x = 0.5 and 31.5.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fbb7e9891-3446-4922-9012-a05c2269548f%2Fa1da585f-e583-4cda-9e23-82f004b1fd15%2Fwhbjg5i_processed.png&w=3840&q=75)
Transcribed Image Text:Consider two economies (A and B) both characterised by the following equations:
Yt = At art-1
πt = [Xπ² + (1 − x)πt−1] + 0.5(Yt — Ye)
L = (Yt − Ye)² + ß(πt − π¹)²
in which equation (1) represents the equilibrium in the goods market, equation (2) the supply
side of the economy, and equation (3) is the Central Bank's loss function. y is output; r is
policy rate; and π are actual and target inflation, respectively; x and ß are parameters for
central bank's credibility and inflation aversion respectively.
=
The values for and for Economy A are x
X
0.8 and 3 = 1.
The values for x and 3 for Economy B are x = 0.5 and 31.5.
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