As an economist working for a U.S.government agency you determine that a particular country has a sacrifice ratio of 7.Policy-makers in that country are thinking of lowering the inflation rate from 10% to 5%.Is this sacrifice ratio higher or lower than the typical estimate? From your numbers,what is the amount of output that will be lost for this country to reduce its inflation rate?

Question

Quizplus · Accepted Answer

A sacrifice ratio of 7 is higher than the typical estimate (which is around 3-5 for developed countries). To calculate the output loss, we use the formula Sacrifice Ratio = (Loss of Output/Gain from Reduced Inflation). Solving for Loss of Output, we get Loss of Output = Sacrifice Ratio x Gain from Reduced Inflation.

In this case, the Gain from Reduced Inflation is 5% - 10% = -5%. We take the absolute value of this to make it positive, so Gain from Reduced Inflation = 5%.

Therefore, Loss of Output = 7 x 5% = 35% of annual output.

So the correct answer is B, which says that the sacrifice ratio is higher than the typical estimate and it will cost 35% of annual output to reach the new inflation target.

As an Economist Working for a U