1.Explain what is meant by the central bank's loss function. How are the central bank's preferences reflected...
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1.Explain what is meant by the central bank's loss function. How are the central bank's preferences reflected in the loss function? Draw the loss 'circles' for the cases where
(a)=1
(b)<1
(c)>1
In which of the three cases will the central bank reduce inflation back to target quickest after an inflation shock? Is there any downside to adopting this policy stance?
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