Assume that the sacrifice ratio for an economy is 4. If the central bank wishes to reduce inflation from 10 percent to 5 percent, this will cost the economy ______ percent of one year's GDP.
A) 4
B) 5
C) 20
D) 40

Question

Quizplus · Accepted Answer

The sacrifice ratio is the percentage of output lost in order to achieve a one-time reduction in inflation of 1 percent. In this case, the central bank wants to reduce inflation by 5 percent, which would require a sacrifice ratio of 4 x 5 = 20. Therefore, the cost to the economy would be 20 percent of one year's GDP.

Assume That the Sacrifice Ratio for an Economy Is 4