For questions 2--5, consider the simplified model of time inconsistency discussed in the lecture. The government minimizes the loss function A = (y-y*)² - + + a(π – π*)², where a > 0, y* is potential output and * is the inflation target. Supply is given by the supply function y = y + b(n − π²), where is the expected inflation rate and y is the long-run output level with y < y*. Mark the correct statements on the intuition for the loss function. Assume that 0 < a < 2. The fact that the constant term a, multiplying the squared deviation of inflation from its optimal level, is smaller than the constant deviation of output from potential output implies that there is less weight in the loss function on deviations of inflation from its target. Assume that 0 < a < 2. The fact that the constant terma, multiplying the squared deviation of inflation from its optimal level, is smaller than the constant in front of the squared in front of the squared

For questions 2--5, consider the simplified model of time inconsistency discussed in the lecture. The government minimizes the loss function A = (y-y)² - + + a(π – π)², where a > 0, y* is potential output and * is the inflation target. Supply is given by the supply function y = y + b(n − π²), where is the expected inflation rate and y is the long-run output level with y < y*. Mark the correct statements on the intuition for the loss function. Assume that 0 < a < 2. The fact that the constant term a, multiplying the squared deviation of inflation from its optimal level, is smaller than the constant deviation of output from potential output implies that there is less weight in the loss function on deviations of inflation from its target. Assume that 0 < a < 2. The fact that the constant terma, multiplying the squared deviation of inflation from its optimal level, is smaller than the constant in front of the squared in front of the squared

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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