Suppose a central bank reduced inflation by 4 percentage points and that made output fall by 4 percentage points for five years, and it made the unemployment rate rise from 3 percent to 7 percent for three years. What is the sacrifice ratio?

Question

Quizplus · Accepted Answer

The sacrifice ratio is calculated as the cumulative loss in output divided by the reduction in inflation. Here, the output fell by 4 percentage points for five years, totaling a 20 percentage point loss. The inflation reduction was 4 percentage points. Thus, the sacrifice ratio is 20/4 = 5.

Suppose a Central Bank Reduced Inflation by 4 Percentage Points