1. Some countries have inflation around or in excess of 8 percent. Suppose that the sacrifice...

1. 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.

2. Why does a downward-sloping Phillips curve imply a positive sacrifice ratio?

3. Suppose that the economy is at an inflation rate such that unemployment is above the natural rate. How does the economy return to the natural rate of unemployment if this lower inflation rate persists? Use sticky-wage theory to explain your answer

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Expert Solution

Rahul Sunny answered 1 year ago

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