Some countries have inflation around or in excess of 8 percent. Suppose that the sacrifice ratio is 2.5 . What is the cost of reducing inflation from 8 percent to 2 percent? In your answer, define the sacrifice ratio and explain how you found the cost of inflation reduction
The sacrifice ratio gives the annual percentage decline in output required to reduce the inflation rate 1 percentage point. The sacrifice ratio is 2.5 so if a country with 8 percent inflation wants to reduce it to 2 percent it will have a reduction in output equal to 2.5 times 6 percent = 15 percent of annual output.
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a. True b. False
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