Explain the sacrifice ratio in respect to reducing inflation. Would the rational expectations view believe a...
Explain the sacrifice ratio in respect to reducing inflation. Would the rational expectations view believe a sacrifice ratio would always exist?
Homework Answers
The sacrifice ratio is the output cost of reducing inflation and defined as the ratio of percentage loss of real output to change of trend inflation. In other words, it is the aggregate loss in output associated with a one percentage point fall in inflation .
A rational expectations view know that inflation can be reduced without sacrificing output.If inflation is caused by supply side factor ,then to correct those error government doesn't need to sacrifice output.for example oil prices is most important input in production in any country,when its price rises ,cost of production rises and so the price level increases ,output decrease and inflation increases. So goverment introduce methods to reduce price of oil prices for firms like giving subsidy to firms, negotiate with countries that provide oil to reduce prices etc. By that oil prices reduces , production costs decreases and aggregate supply curve shifts rightwards. Due to increase in supply price level decreases and so the inflation and output also increase.
So having a rational view ,they don't believe a sacrifice ratio would always exits.
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Explain the sacrifice ratio in respect to reducing inflation.
Would the rational expectations view believe a...
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