Chapter 3 - Central bank and MR Curve

Question 1

CB Loss function

Answer 1

Curves representing the cost / disutility that the central bank incurs by being away from the inflation target and from equilibrium output

Question 2

Formula for Indifference curve

Answer 2

( yt − y^T )^2 + β (π t − π ^T) ^2

Large β means CB is inflation averse (opposite is true)

Question 3

MR Curve

Answer 3

A best response curve showing the combinations of inflation and output that a central bank will choose given the Philips curve it faces; a curve that determines the output gap that the central bank should set in order to stabilise the economy after a shock. The curve essentially shows the path along which the CB will go in order to guide the economy back to the point of medium-run equilibrium.

Question 4

MR Formula

Answer 4

(yt − y^T−) = -αβ(πt-π^T )