Question

1. Assuming the typical sacrifice ratio given in lecture, consider an economy where inflation is 8 percent and the government wants it to be 5% instead. This economy must sacrifice _____ percent of one year’s GDP to do so.

(Carefully follow all numeric directions. Enter your answer "as a percent, but without the percentage sign." In other words, if the economy must sacrifice 99 percent of one year's GDP, enter only 99 in the blank.)

2. Use the information from the last question. Let’s say residents of the economy can endure only a loss of 3% real GDP per year. How many years must this sacrifice happen?

3. Use the information from the above one last time – the above yearly sacrifice in GDP means an increase in unemployment of _______ percent each year.

Answer 1

As question said to assume sacrifice ratio given in lecture but that sacrifice ratio is not given in question so i am gonna use the sacrifice ratio of USA economy calculated from USA Phillips curve and okun's law.

Phillips curve USA

Inflation=expected inflation -0.5(unemployment-natural rate of unemployment ).

So basically USA Phillips curve tells us being expectations constant unchanged and remain at previous year inflation( expectation that inflation will be same), to reduce 1% inflation we need to 2% cyclical unemployment .

Okun's law,

% change in gdp= 2(unemployment-natural rate of unemployment ).

Okun's law tells 1% change in cyclical unemployment leads 2% change in gdp.

So sacrifice ration will 4%.

1. To reduce inflation from 8% to 5% government wants inflation by reduce 3 percentage point .

So the economy must sacrifice 12(4*3) percent of gdp{ in your case sacrifice ratio may be different the gdp sacrifice would be=sacrifice ratio*change in inflation}

2. on aggregate there should be 12% sacrifice in an year but if we sacrifice 3% per year ,we need to sacrifice that 4 years.{ In your case the years =sacrifice % of gdp/3

3.as i explained okun's law tells ,to change in 1% in gdp ,0.5 percentage point change in cyclical unemployment needed.

As sacrifice gdp is 12%, unemployment increase would be =12/2=6%{ this can only be answer through okun's law}