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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 C1 500.0 500.0 500.0 3.0 3.0 3.02 515.0 500.0 520.0 3.0 2.8 3.23 530.5 520.0 535.0 3.0 2.0 4.04 546.4 540.0 550.0 3.0 1.5 4.55 526.8 562.8 562.8 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.
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