# Consider three alternative policies, each with a different set of outcomes in terms of - 23918

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11. Consider three alternative policies, each with a different set of outcomes in terms of output and inflation, as shown in following table:

Output          Output      Output                Inflation    Inflation    Inflation

Policy A       Policy B    Policy C            Policy A   Policy B    Policy C

1       500.0             500.0        500.0                 3.0            3.0             3.0

2       515.0             500.0        520.0                 3.0            2.8             3.2

3       530.5             520.0        535.0                 3.0            2.0             4.0

4       546.4             540.0        550.0                 3.0            1.5             4.5

5       526.8             562.8        562.8                 3.0            1.5             4.5

Potential Output is 500 in period 1 and rises 3 percent per year. The Fed's objective function is

where w= 1, and the inflation target is 2.0 percent.

A. Calculate the value of the objective function over the five-year period for each of the three policies.

B. Which policy is best? Why?

C. Would your answer to part b change if w= 5? Explain.

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