If the sacrifice ratio is 3, reducing the inflation rate from 10 percent to 8 percent would require sacrificing how much annual output?
A)2 percent of annual output
B)6 percent of annual output
C)8 percent of annual output
D)10 percent of annual output

Question

Quizplus · Accepted Answer

The sacrifice ratio is the percentage of short-run output lost when inflation decreases by one percentage point. In this case, the sacrifice ratio is 3. Therefore, to reduce inflation from 10 percent to 8 percent, we need to sacrifice 2 percentage points of inflation. Since the sacrifice ratio is 3, the sacrifice in terms of annual output would be 2 times the sacrifice ratio, which is 6 percent of annual output. Therefore, the best choice is B, which is 6 percent of annual output.

If the Sacrifice Ratio Is 3, Reducing the Inflation Rate