The Phillips Curve Describing an Economy Takes the Form U

question 59

Multiple Choice

The Phillips curve describing an economy takes the form u = uⁿ - α(π - Eπ) . The central bank directly sets the inflation rate to minimize the following loss function, L (u, π) = u + γπ². The symbol u denotes the unemployment rates, uⁿ is the natural rate of unemployment, π is the inflation rate, Eπ is the expected inflation rate, and α and γ are behavioural response parameters of the economy. Private agents form their expectations rationally before the central bank sets the inflation rate. The optimal inflation rate when the central bank operates using a fixed rule will be _____. The optimal inflation rate when the central bank operates with discretion will be _____.

• A)uⁿ; 0
• B)0; uⁿ
• C)0; α/(2γ)
• D)α/(2γ); 0

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Definitions:

Binomial Random Variable

A type of random variable that represents the number of successes in a fixed number of binary experiments.

Binomial Experiment

A statistical experiment that fits the binomial distribution; characterized by fixed number of trials, two possible outcomes per trial, independent trials, and constant probability of success.

Trials

In statistics and research, trials refer to individual attempts or experiments conducted to test a hypothesis or observe outcomes.

Poisson Distribution

A discrete frequency distribution that expresses the probability of a given number of events happening in a fixed interval of time or space.