Textbook question from Macroeconomics institutions instability and the financial system

Chapter 13: Problems and Questions for Discussion #2 (pg504)

Central bank has the following loss function: L=(yt ye)+(t T )2 (13.1) Consult Chapter 13 to answer the following questions:

(a)What can we interpret about the central bank's preferences from this loss function (Equation 13.1)?

(b)Briefly explain how this loss function compares to the standard loss function and a loss function with yT > ye.

(c) Find the inflation bias for a central bank with this loss function (Equation 13.1). [Hint: see Section 4.6 in Chapter 4].