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Let the Symbol π\pi Stand for the Rate of Inflation,with EE π\pi

Question 86

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Let the symbol π\pi stand for the rate of inflation,with EEπ\pi the expected inflation rate,both measured in percent.The letter u is the unemployment rate and un is the natural rate of unemployment.Suppose the short-run Phillips curve u = un - α\alpha ( π\pi - EEπ\pi )applies in a certain economy.The central bank's loss function L(u, π\pi )= u + γ\gammaπ\pi 2.The analysis in the appendix to textbook Chapter 14 shows that if the central bank minimizes its loss function under the assumption that EEπ\pi is fixed and "rational" private agents know this,the expected inflation rate will be EEπ\pi = α\alpha /2 γ\gamma ,and this will also be the inflation rate the government chooses.a.Suppose that α\alpha = 0.5 and γ\gamma = 0.05.What are the expected and actual inflation rates?
b.Suppose α\alpha = 0.5 and γ\gamma = 0.50.In this case,does the central bank have greater or lesser relative distaste for inflation than in part a? What are the expected and actual inflation rates with γ\gamma = 0.50? Why do they differ from the inflation rates in part a?

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b. The c...

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