Suppose the economy is at its natural rate of unemployment of 6% with a real output of $900 billion, but policymakers plan to reduce inflation from 8 percent to 4 percent gradually over a period of six years by creating a recession

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Suppose the economy is at its natural rate of unemployment of 6% with a real output of $900 billion, but policymakers plan to reduce inflation from 8 percent to 4 percent gradually over a period of six years by creating a recession.

1. If the sacrifice ratio is 3, relative to maintaining full employment, what is the cumulative loss in output this recession will entail? a) $30b or less                 b) more than $30b but less than $60b   c) more than $60b but less than $90b           d) more than $90b (the answer is 108, d)

2. If Okun's law says that an extra percentage point of unemployment above the natural rate corresponds to a drop in output of 2 percentage points, what unemployment rate will the economy be required to experience over these six years?

a) 6% or less                    b) more than 6% but not more than 7% c) more than 7% but not more than 8%                d) more than 8%