We develop simple diagrams that can be used by undergraduates to understand interest rate setting by policy-makers. We combine an inflation target, Fisher equation, policy reaction function and short and long run aggregate supply analysis to give a depiction of the policy problem. We illustrate...

The implications for optimal monetary policy of relaxing the normal assumption of a quadratic loss function are examined. Several alternative specifications are considered, but the results suggest that the convenient assumption of quadratic losses may not be that drastic