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Dynamic inconsistency Suppose a central bank has the following loss function over inflation It and unemployntent u: L = n2+1[u)2 and the Phillips curve is

Dynamic inconsistency

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Suppose a central bank has the following loss function over inflation It and unemployntent u: L = n2+1[u)2 and the Phillips curve is given by u= u" (n1F) where E is unemployment target. it" is the natural unemployment. and 11' is expected ination. Suppose that inflation expectations are anchored 2 percent. Iftr = A = 1 and = u". what rate of inflation will the central bank choose? Show your work

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