The lag between the time that the money supply is
increased and the time that investment expenditures increase is an
example of a:
a. monetary outside lag.
b. fiscal inside lag.
c. fiscal outside lag.
d. monetary inside lag.
The Phillips curve describing an economy takes the form
u = un – α(π – Eπ). The central bank directly sets the inflation
rate to minimize the following loss function, L (u, π) = u + γπ2.
The symbol u denotes the unemployment rates, un is the natural rate
of unemployment, π is the inflation rate, Eπ is the expected
inflation rate, and α and γ are behavioral response parameters of
the economy. Private agents form their expectations rationally
before the central bank sets the inflation rate. The optimal
inflation rate when the central bank operates using a fixed rule
will be ______. The optimal inflation rate when the central bank
operates with discretion will be ______.
a. un; 0
b. 0; α/(2γ)
c. α/(2γ); 0
d. 0; un