Some Numerical Examples

For ease of exposition we make the following assumptions. The targets of the European central bank are zero inflation and zero unemployment in Europe. The weights of inflation and unemployment in the loss function are equal. The monetary policy multipliers are unity. A unit increase in European money supply lowers the rate of unemployment in Europe by 1 percentage point. On the other hand, it raises the rate of inflation in Europe by 1 percentage point. For easy reference, the solution is reproduced here:

(1)

$$\Delta {\rm{M = 0}}{\rm{.5}}\left( {{\rm{u}} - {\rm{\pi }}} \right)$$

ΔM denotes the required change in European money supply, π is the initial rate of inflation in Europe, and u is the initial rate of unemployment in Europe.