The Phillips curve describing an economy takes the form u = uⁿ - α(π - Eπ). The central bank directly sets the inflation rate to minimize the following loss function, L (u, π) = u + γπ². The symbol u denotes the unemployment rates, uⁿ is the natural rate of unemployment, π is the inflation rate, Eπ is the expected inflation rate, and α and γ are behavioural response parameters of the economy. Private agents form their expectations rationally before the central bank sets the inflation rate. In an economy in which the central bank dislikes inflation much more than unemployment: A)α will be very large. B)a will be very small. C)γ will be very large. D)γ will be very small.

Question

Quizplus · Accepted Answer

If the central bank dislikes inflation much more than unemployment, it will place a higher weight on minimizing inflation in its loss function, which means γ will be very large.

The Phillips Curve Describing an Economy Takes the Form U