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Unformatted text preview: The public try to set wage inflation so as to minimize its loss function ], ) ~ [( 2 t t p w E L= i.e. so that wage inflation matches the rate of inflation for consumption goods. Assume that both the public and the central bank know each others loss functions and the Phillips curve. a) Suppose the central bank sets x t before the public sets w t . Determine the optimal policy for both. This is known as the Ramsey equilibrium. b) Now suppose the public sets w t before the central bank sets x t . Determine the optimal policy for both. This is known as the Nash equilibrium c) Compute the central banks loss function for both equilibria, and show that it is higher for the Nash equilibrium than for the Ramsey equilibrium. d) Explain how it is possible that the central bank achieves a worse outcome if it employs more information in its decision making....
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This note was uploaded on 01/09/2011 for the course ECON 7140 taught by Professor Kutler during the Spring '10 term at Utah Valley University.
 Spring '10
 Kutler
 Microeconomics, Inflation, Phillips Curve, Unemployment

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