If a central bank reduced inflation by 3 percentage points and in the short run this made output fall by 3 percentage points for 3 years and the unemployment rate rise from 3 percent to 9 percent for three years,the sacrifice ratio is
A)1.
B)2.
C)3.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The sacrifice ratio is the percentage of output that must be forgone in order to decrease inflation by 1 percentage point. In this case, the central bank reduced inflation by 3 percentage points, so the sacrifice ratio can be calculated as follows:

Sacrifice ratio = (% Change in output / % Change in inflation)

% Change in output = -3% for 3 years = -9%
% Change in inflation = -3%

Sacrifice ratio = (-9% / -3%) = 3

Therefore, the best choice is C) 3 as the sacrifice ratio.

If a Central Bank Reduced Inflation by 3 Percentage Points