An economy has a current inflation rate of 7%.If the central bank wants to reduce inflation to 4% and the sacrifice ratio is 2,then how much annual output must be sacrificed in the transition?
A)10%
B)8%
C)6%
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The sacrifice ratio measures how much output must be sacrificed for a 1% reduction in inflation. In this case, the sacrifice ratio is 2, so for a reduction of 3% (from 7% to 4%), the output must be sacrificed by 2 x 3 = 6%. Therefore, the answer is C, 6%.

An Economy Has a Current Inflation Rate of 7