Briefly explain what the sacrifice ratio is and how policy makers can use it in their decision making. Then give an example of policymaking using the sacrifice ratio that highlights the limits of this tool.
What will be an ideal response?
Student responses will vary but should accurately describe the sacrifice ratio and its drawbacks. The sacrifice ratio is the amount of output lost when the inflation rate is reduced by one point. For instance, a sacrifice ratio of 2 means that 2 percent of annual output is lost for each point inflation is reduced. Policy makers can consider the sacrifice ratio when deciding if the benefits of reducing inflation are worth the cost of reducing output and jobs. However, the sacrifice ratio is an imprecise measure, which limits its power as a policymaking tool. A central bank might decide that, with unemployment low, inflation high, and a sacrifice ratio of 2, it should restrict the money supply. A year later, after an unexpected trade war has driven up unemployment beyond what the central bank was anticipating, the central bank might see that the actual sacrifice ratio was 5 and regret its earlier decision.
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Since 1980, the female/male annual earnings ratio of full-time workers has been ____, while the labor force participation rate of women has been ____ during this same period
a. rising; declining b. rising; increasing c. falling; increasing d. falling; declining
Kim owns a small business in Denver. She travels frequently, meeting with important customers, and attending conferences. Kim hired Matt to work in the Denver office as the day-to-day general manager of the business
a. This is a moral hazard problem since Matt may not work as hard as Kim would like when he is not monitored. b. Kim choosing to hire Matt is an example of adverse selection since it is possible that Matt will not work as hard as Kim expects. c. Kim will most likely pay Matt a lower salary than normal since Kim will not be there to monitor Matt's work effort, and since Matt will not likely work hard knowing Kim cannot monitor his effort. d. Kim is the agent and Matt is the principal.
Which of the following is a characteristic of a corporation but not of a small family-owned business?
a. The corporation buys inputs in markets for the factors of production. b. The corporation sells output in markets for goods and services. c. The corporation is guided in its decisions by the objective of profit maximization. d. The corporation faces a principal-agent problem created by the separation of ownership and control.
The difference between the national debt and a federal budget deficit is
A) nothing; the national debt and the budget deficit are the same thing. B) the federal budget deficit represents the total amount of outstanding government debt while the national debt includes only the increase in the debt during the current year. C) the national debt represents the cumulative effect of all previous budget deficits and surpluses, while the federal budget deficit reflects only the additions to the debt during the current year. D) the national debt is financed primarily through government bonds, while the deficit is financed through taxes.