M&B3 3rd Edition by Dean Croushore

تمرين 3

Consider three alternative policies, each with a different set of outcomes in terms of output and inflation, as shown in the following table:

Potential output is 500 in period 1 and rises 3 percent per year. The Fed's objective function is

where w = 1, and the inflation target is 2.0 percent.
a Calculate the value of the objective function over the five-year period for each of the three policies.
b Which policy is best Why Which policy is worst
c Would your answer to part b change if w = 5 Explain.