Answer the following questions, using appropriate diagrams to help explain your answers where necessary. Remember to correctly cite and reference any sources that you use although researched answers are not required and it is preferable to write from your understanding of the course material as you would have to do in a traditional exam. In the IS-PC-MR modelit is assumed that the Central Bankhas in mind a target rateof inflationbut is also concerned about output (and, therefore, employment). This idea is represented by a "loss function" such as L = (y-y_e)² + b(p-p^T)². (a) If b>1, sketch a set of such loss functions in output-inflation space.

(b) The Phillips curve of the form p = p_-1+ a(y-y_e) acts as a constraint on getting loss down to zero. Show how to use Phillipscurves to derive a monetary policyrule for a Central Bank which has the sort of loss function described in (a). (5 marks)

(c) In setting monetary policy, a Central Bank needs knowledge of parameters such asa, b, y_eandp^T. Explain what each of these parameters is and their importance in setting monetary policy.