If a central bank reduced inflation by 4 percentage points and this made output fall by 5 percent for one year and 3 percent for another year and the unemployment rate rise 2.5 percent above its natural rate for one year and 1.5 percent above its natural rate for another year,the sacrifice ratio was
A)1.
B)2.
C)3.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The sacrifice ratio represents the percentage loss of output required to permanently reduce inflation by 1 percentage point. 
In this case, the central bank reduced inflation by 4 percentage points, which means a sacrifice of output for two years. 
To calculate the sacrifice ratio, we add up the percentage loss of output for both years and divide it by the percentage reduction in inflation:

Sacrifice ratio = ((5% + 3%) / 2) / 4% = 2

Therefore, the answer is B.

If a Central Bank Reduced Inflation by 4 Percentage Points