Question

Suppose the bank of canada reduces inflation 2 percentage points, and this makes output fall 10 percentage points and unemployment rises 4 percentage points. what is the sacrifice ratio?

a. 1/5
b. 2
c. 5
d. 8

Answer 1

The sacrifice ratio is calculated by dividing the increase in unemployment by the decrease in inflation. Here, a 4 percentage point rise in unemployment over a 2 percentage point decrease in inflation gives a sacrifice ratio of 2.

Step-by-step explanation:

This involves understanding the concept of the sacrifice ratio, which is a measure used in economics to quantify the costs of reducing inflation in terms of the unemployment that economies suffer in the process. Given that the Bank of Canada reduces inflation by 2 percentage points, leading to a 10 percentage point fall in output and a 4 percentage point rise in unemployment, the sacrifice ratio is calculated by dividing the percentage point increase in unemployment by the percentage point decrease in inflation. In this case, the correct calculation is 4 (rise in unemployment percentage points) / 2 (reduction in inflation percentage points), which equals a sacrifice ratio of 2, corresponding to the option 'b.'