Suppose that a central bank minimizes a quadratic loss function that depends on the deviation of: (i) the rate of inflation from its target, ne*; (ii) the growth rate of output from a growth target, g*; and (iii) J arbitrary financial stability variables with different target rates, st Vi E J. Assume also that the weight of the deviation of output growth in the loss function is a, while each of the ) stability variables are weighed by a different level, Bi Vie). The growth rate of output has a natural rate, g^, and the financial stability variables all have their own natural rates si Vi E J. Output growth is found to be positively related to inflation in excess of expectations with a factor a, whereas each stability variable is found to be negatively correlated to inflation in excess of expectations with a different factor b VieJ. 1. Modify the set-up of the Barro-Gordon model based on the assumptions above and find the optimal policy response of the central bank under rational expectations. Interpret your results. 2. How would you expect the inclusion of multiple objectives to influence the implementation and credibility of monetary policy? Suppose that a central bank minimizes a quadratic loss function that depends on the deviation of: (i) the rate of inflation from its target, ne*; (ii) the growth rate of output from a growth target, g*; and (iii) J arbitrary financial stability variables with different target rates, st Vi E J. Assume also that the weight of the deviation of output growth in the loss function is a, while each of the ) stability variables are weighed by a different level, Bi Vie). The growth rate of output has a natural rate, g^, and the financial stability variables all have their own natural rates si Vi E J. Output growth is found to be positively related to inflation in excess of expectations with a factor a, whereas each stability variable is found to be negatively correlated to inflation in excess of expectations with a different factor b VieJ. 1. Modify the set-up of the Barro-Gordon model based on the assumptions above and find the optimal policy response of the central bank under rational expectations. Interpret your results. 2. How would you expect the inclusion of multiple objectives to influence the implementation and credibility of monetary policy