Suppose the Bank of Canada reduces inflation 3 percentage points, and this makes output fall 12 percentage points and unemployment rises 4 percentage points. What is the sacrifice ratio?

Question

Quizplus · Accepted Answer

The sacrifice ratio is calculated as the percentage point increase in unemployment divided by the reduction in inflation. In this case, it's 4 percentage points increase in unemployment divided by 3 percentage points reduction in inflation, which equals a sacrifice ratio of 4/3 or approximately 1.33. However, given the options provided and the context of the question, it seems there might have been a misunderstanding in the interpretation. The correct approach to find the sacrifice ratio typically involves the loss in output relative to the reduction in inflation, which would indeed be 12 (the loss in output) divided by 3 (the reduction in inflation), giving a ratio of 4. This indicates a mistake in my initial explanation regarding the common definition of the sacrifice ratio, which more accurately relates to output loss per inflation reduction, hence the correct choice is C, reflecting a ratio of 4.

Suppose the Bank of Canada Reduces Inflation 3 Percentage Points