Consider three alternative policies each with a different

Reference no: EM13363743

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

Output Output Output Inflation Inflation Inflation
Policy A Policy B Policy C Policy A Policy B Policy C
1 500.0 500.0 500.0 3.0 3.0 3.0
2 515.0 500.0 520.0 3.0 2.8 3.2
3 530.5 520.0 535.0 3.0 2.0 4.0
4 546.4 540.0 550.0 3.0 1.5 4.5
5 526.8 562.8 562.8 3.0 1.5 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 percent.

A. Evaluate 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? Explain.

Reference no: EM13363743

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