Let the Symbol $\pi$ Stand for the Rate of Inflation,with $E$ $\pi$

question 93

Essay

Let the symbol $\pi$ stand for the rate of inflation,with $E$$\pi$ the expected inflation rate,both measured in percent.The letter u is the unemployment rate and uⁿ is the natural rate of unemployment.Suppose the short-run Phillips curve u = uⁿ - $\alpha$ ( $\pi$ - $E$$\pi$ )applies in a certain economy.The central bank's loss function L(u, $\pi$ )= u + $\gamma$$\pi$ ².The analysis in the appendix to textbook Chapter 14 shows that if the central bank minimizes its loss function under the assumption that $E$$\pi$ is fixed and "rational" private agents know this,the expected inflation rate will be $E$$\pi$ = $\alpha$ /2 $\gamma$ ,and this will also be the inflation rate the government chooses.a.Suppose that $\alpha$ = 0.5 and $\gamma$ = 0.05.What are the expected and actual inflation rates?
b.Suppose $\alpha$ = 0.5 and $\gamma$ = 0.50.In this case,does the central bank have greater or lesser relative distaste for inflation than in part a? What are the expected and actual inflation rates with $\gamma$ = 0.50? Why do they differ from the inflation rates in part a?

---

Definitions:

Polysemy

Having many possible meanings or interpretations.

Textual Poaching

The practice of fans or consumers creatively appropriating and transforming media content for their own purposes.

Henry Jenkins

An American media scholar and Provost Professor at the University of Southern California, known for his work on media convergence and participatory culture.

Magic Bullet Model

A communication theory that implies that mass media messages have a direct, immediate, and powerful effect on their audiences.