If the sacrifice ratio is five, a reduction in inflation from 7 per cent to 3 per cent would require
A) a reduction in output of 5 per cent.
B) a reduction in output of 15 per cent.
C) a reduction in output of 20 per cent.
D) a reduction in output of 35 per cent.

Question

Quizplus · Accepted Answer

The sacrifice ratio is the percentage of GDP that must be foregone to reduce inflation by 1 percentage point. Therefore, if the sacrifice ratio is five, a reduction in inflation from 7 per cent to 3 per cent would require a sacrifice of 4 percentage points. Therefore, the reduction in output would be equal to 5 times the sacrifice ratio, or 20 per cent. Thus, option C is the correct answer.

If the Sacrifice Ratio Is Five, a Reduction in Inflation