Consider an economy that is in the process of a disinflation. Suppose that over a 2- year period, the rate of inflation is reduced from 6 percent to 1 percent. Over this same time, the cumulative loss in real GDP is $30 billion. Potential GDP is $600 billion. What is the sacrifice ratio?

Question

Quizplus · Accepted Answer

The sacrifice ratio is the cumulative loss in real GDP divided by the potential GDP. In this case, the cumulative loss in real GDP is $30 billion and the potential GDP is $600 billion, so the sacrifice ratio is $30 billion / $600 billion = 0.05, or 5%. The closest answer choice is A) 1, which is the correct answer.

Consider an Economy That Is in the Process of a Disinflation