Question

Question 1 Assume that inflation and social welfare are given by r = ne-au- u*) and S=-u-w/212 respectively. We also assume that the expected inflation ne has been set by the time the central bank gets to make its decisions. a) What inflation rate will the central bank pick if they optimize welfare? Show all the steps and discussion analytically. b) If the Central Banks announces that expected inflation ne is going to be 0, does it have incentive to deviate when the time to set inflation comes? How much inflation, unemployment, and social welfare will be in the case of non commitment? Show all the steps and discussion analytically. c) Discuss your results. Which model is that? What do models like this imply for the design of central bank institutions?

Answer 1

(a).inflation targeting is a monetary policy where the Central banks sets a specific inflation rate as it's goal.the central bank does this to make you believe prices will continue rising it spurs the economy by making you buy things now before they cost more.most central bank inflation rate is 2%.

Assume that inflation and social welfare are given by

n=ne-a(u-u*)ands=u=w/2n2

Respectively we also assume that the expected inflation ne has been set by the time the central bank gets to make it's decisions.

If the central banks announces that expected inflation ne is going to be 0 does it have incentive to deviate when the time to set inflation comes?how much inflation unemployment and social welfare will be in the case of non commitment ?show all the steps and discussion analytically. MI l