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Suppose that a central bank has the following loss function: - V = - Mu - ku ) + - TT- 0 0 N 2

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Suppose that a central bank has the following loss function: - V = - Mu - ku" ) + - TT- 00 N 2 Where u = the unemployment rate u" = the natural level of unemployment, and 7 = inflationThe central bank can control inflation and the economy is characterized by a Phillips curve as follows: uzunaUrire). Interpret the central bank loss function. Derive the equilibrium rate of inflation under discretion and interpret your result. How does a fall in u\" affect the equilibrium rate of inflation

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