We have the loss function and the Phillips curve:

= 2 + 2 and = ( ) +

Where is the expected inflation rate. The policymaker can see the cost push shock and react to it.

1. a)Find the loss-minimising inflation as a function of and un
2. b)Assume that wage setters can perfectly foresee the shock and the inflation rate chosen by the policymaker.
3. What will the inflation rate be?
4. c)Compare this case to the case (discussed in the previous question) where expected inflation is equal to
5. inflation in the previous period.