Asked by Camille Esselin on Jun 11, 2024
Verified
Some countries have inflation around or in excess of 8 percent. Suppose that the sacrifice ratio is 2.5. What is the cost of reducing inflation from 8 percent to 2 percent? In your answer, define the sacrifice ratio and explain how you found the cost of inflation reduction.
Sacrifice Ratio
A measure of the economic cost of reducing inflation, quantified by the percentage loss in output or production for a one percent decrease in inflation.
Inflation Reduction
Efforts or policies aimed at slowing the rate of inflation in order to stabilize the economy and maintain the purchasing power of currency.
- Compute and elucidate the sacrifice ratio within disinflation scenarios.
Verified Answer
DC
DANTE CUEVASJun 11, 2024
Final Answer :
The sacrifice ratio gives the annual percentage decline in output required to reduce the inflation rate 1 percentage point. The sacrifice ratio is 2.5 so if a country with 8 percent inflation wants to reduce it to 2 percent it will have a reduction in output equal to 2.5 times 6 percent = 15 percent of annual output.
Learning Objectives
- Compute and elucidate the sacrifice ratio within disinflation scenarios.