If the sacrifice ratio is 2, reducing the inflation rate from 10 percent to 7 percent would require sacrificing how much annual output?
A) 2 percent of annual output
B) 3 percent of annual output
C) 5 percent of annual output
D) 6 percent of annual output

Question

Quizplus · Accepted Answer

The sacrifice ratio is the amount of annual output that must be foregone to reduce inflation by 1 percentage point. With a sacrifice ratio of 2, reducing inflation from 10% to 7% (a 3 percentage point reduction) requires sacrificing 2% of annual output for each percentage point of inflation reduced, totaling 6% (2% * 3 = 6%).

If the Sacrifice Ratio Is 2, Reducing the Inflation Rate