Q1:

Use the Fed rule of thumb and Okun's rule of thumb given in the text to determine the interest rate the Fed would set if inflation was 4% and unemployment was 2% above the natural rate and the neutral rate of interest is 3%. What is the fed funds rate?

A. 10% B. 9% C. 5% D. 4%

Q2:

An oil shock hits the economy and causes many businesses to raise prices for the goods they sell. The oil shock causes potential output and actual output to shrink so that there is now a negative output gap of 1%. In addition, inflation is now higher than the target inflation rate. Suppose the Fed wants to address the negative output gap.

T/F: The Fed will lower interest rates and inflation will rise even more.

Q3:

Before the coronavirus pandemic and economy wide stay at home orders, assume the economy was operating at potential output. At that time the unemployment rate was 3.5%. Now the unemployment rate stands at 14.5%. Using Okun's rule of thumb as described in the text, what would be the estimate for the output gap?

A. negative 11% B. negative 22%

C. positive 11% D. positive 22%

Just answer the option to choose and a brief explaination.