ECON385 Study Guide - Final Guide: Root Mean Square, Balanced-Growth Equilibrium, Real Interest Rate
9 Aug 2016
School
Department
Course
Professor
Document Summary
You should solve questions 5 and 6 only if you missed the midterm exam! You have extra 30 minutes to complete all questions: (30 points) consider a central bank that minimizes the following loss function: L = (y yt )2 + ( t )2, where yt is the socially optimal rate of output (after correcting for the pre-existing distortions in the economy). 1 (d) (6 points) suppose that the central bank announces it will keep its in ation rate at the target rate of zero, and it is believed by the public. Find the in ation rate, output, and the resulting loss in this equilibrium. Brie y discuss the logic behind time inconsistency of low-in ation monetary policy (in this case, zero-in ation monetary policy). (e) (4 points) suppose that, before private sector in ation expectations were formed, the central bank could commit to the zero in ation rate.
