An economy has a current inflation rate of 12%. If the central bank wants to reduce inflation to 4% and the sacrifice ratio is 2, how much annual output must be sacrificed in the transition?

Question

Quizplus · Accepted Answer

The sacrifice ratio is the percentage of annual output lost to reduce inflation by 1%. To reduce inflation from 12% to 4%, a reduction of 8% is needed. With a sacrifice ratio of 2, the economy must sacrifice 16% of annual output (8% reduction * 2).

An Economy Has a Current Inflation Rate of 12