Given a sacrifice ratio of five, how much output must be reduced to lower inflation from 7% to 3%?

Multiple choice question for The Phillips Curve. Select an option, then review the explanation below.

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An output decrease of 20 percentAn output decrease of 5 percentAn output decrease of 15 percentAn output decrease of 35 percent

Explanation

The sacrifice ratio indicates the percentage of output lost for each percentage point reduction in inflation. With a sacrifice ratio of 5 and a 4% drop in inflation (from 7% to 3%), the total output reduction equals 5 multiplied by 4%, resulting in a 20% decrease in output.

Practice related questions from the same subject.

1.What is the likely effect of a credible and announced monetary policy tightening if individuals form rational expectations?
2.Refer to Exhibit 6. If the economy is initially at long-run equilibrium at point E, which point will the economy move toward following an unanticipated monetary tightening?
3.Refer to Exhibit 6. If the economy is initially at long-run equilibrium at point E, what point will the economy move toward following a sudden rise in government expenditure?
4.Based on Exhibit 6, if individuals anticipate a 3% inflation rate and the actual inflation rate is also 3%, at which point is the economy functioning?
5.What is the effect of a reduction in the price of imported oil on the short-run Phillips curve?

Given a sacrifice ratio of five, how much output must be reduced to lower inflation from 7% to 3%?

Explanation

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