Reference no: EM13205279
Consider three alternative policies, each with a different set of outcomes in terms of output and inflation, as shown in the following table: Output Policy A (1) 500.0, (2) 515.0, (3) 530.5, (4) 546.4, (5) 562.8. Output Policy B (1) 500.0, (2) 500.0, (3) 520.0, (4) 540.0, (5) 562.8. Output Policy C (1) 500.0, (2) 520.0, (3) 535.0 (4) 550.0, (5) 562.8. Inflation Policy A (1) 3.0, (2) 3.0, (3) 3.0, (4) 3.0, (5) 3.0. Inflation Policy B (1) 3.0, (2) 2.8, (3) 2.0, (4) 1.5, (5) 1.5. Inflation Policy C (1) 3.0, (2) 3.2, (3) 4.0, (4) 4.5, (5) 4.5.
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%.
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?
C- Would your answer to part b change if w= 5?
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