Exercise 1Consider the following scenario.Aggregate output y at date t is specified as follows,where the trend level of output is represented by ý.The central bank's loss function is captured byY₁ = π₁ = n₁ + ý1L² = 2/1 (y₁ − k)² + − (π₁)² -- bлtba₁Where a > 0, and where k > 0 is a given parameter reflecting the normal level of aggregate production or the target level of output.Notation: y₁: output/production; : inflation rate; : expected inflation rate; L: loss function; a, b, k: constant parameters; t: time index.Having considered the scenario above complete the following tasks:a) Explain the economic intuition behind the loss function of the central bank. In particular explain what the parameter brepresents. (Hint: You may wish to plot the different components of the loss function in a graph to see what it looks like).Also, interpret the quadratic nature of the Loss function.b) Solve the central banks optimisation problem and derive the level of that the central bank will select. (NB: You don't needto consider the money supply. Thus, for this problem assume that the central bank can precisely achieve it's desired inflationlevel.)c) Do you think that the parameter, b, was higher in the ECB under the leadership of Trichet or Draghi? Explain your reasoning.Do you think that the assumption in part b), that the ECB can readily achieve it's desired inflation has been realistic in theperiod since the 2009 financial crisis?

Output Equation in the economy -yt=πt-πte+y⏜ Where πt = Actual inflation rateπte = Expected…

Consider the following scenario. Aggregate output y at date t is specified as follows, where the trend level of output is represented by ý. The central bank's loss function is captured by Y₁ = π₁ n₁ + ÿ L = (y₁ − k)² + 1⁄2 (π₁)² − b ²₁ Where a > 0, and where k> 0 is a given parameter reflecting the normal level of aggregate production or the target level of output. Notation: y,: output/production; ,: inflation rate; : expected inflation rate; L: loss function; a, b, k: constant parameters; t: time index.

Consider the following scenario. Aggregate output y at date t is specified as follows, where the trend level of output is represented by ý. The central bank's loss function is captured by Y₁ = π₁ n₁ + ÿ L = (y₁ − k)² + 1⁄2 (π₁)² − b ²₁ Where a > 0, and where k> 0 is a given parameter reflecting the normal level of aggregate production or the target level of output. Notation: y,: output/production; ,: inflation rate; : expected inflation rate; L: loss function; a, b, k: constant parameters; t: time index.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Please do D and E! Please be consice but accurate and detailed where necessary. Thanks so much :)
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Expected growth in real GDP = 1%; inflation = 4%
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