Optimal Central Bank Design

a)Assume a temporary negative aggregate supply shock strikes an economy. Please explain how a central bank with a strict inflation target will respond to this event? What is the impact of the central banks response on inflation and the output gap in the short and long run? Explain your answer in words and with a graph based on the AS-AD model.

b)Assume a temporary negative aggregate demand shock strikes an economy. Please explain how a central bank with a strict inflation target will respond to this event? What is the impact of the central banks response on inflation and the output gap in the short and long run? Explain your answer in words and with a graph based on the AS-AD model.

c)Many nations have given their central banks strict inflation targets. Why? What is the benefit of an inflation target? What is the cost?Explain this with reference to your answers to (a) and (b) above and any other information that available from the lectures and textbook.