Each of the following conditions will tend to reduce the sacrifice ratio except when:
A) workers and firms set wages and prices based on rational expectations.
B) policymakers make credible commitments to policy changes.
C) announcements of policy changes are made before workers and firms have formed expectations.
D) the concept of hysteresis accurately describes the impact of history on the natural rate of unemployment.

Question

Quizplus · Accepted Answer

The sacrifice ratio is a measure of the cost of reducing inflation in terms of lost output or unemployment. Conditions A, B, and C can all help to reduce the sacrifice ratio by making inflation expectations more accurate or policy changes more credible, thus reducing the economic costs of lowering inflation. However, D, the concept of hysteresis, suggests that past high unemployment can increase the natural rate of unemployment, potentially making it more costly (in terms of output or employment) to reduce inflation, thus not reducing the sacrifice ratio.

Each of the Following Conditions Will Tend to Reduce the Sacrifice