Question

Proponents of rational expectations theory argued that, in the most extreme case, if policymakers are credibly committed to reducing inflation and rational people understand that commitment and quickly lower their inflation expectations, the sacrifice ratio could be as small as_____________

Answer 1

Answer:

The sacrifice ratio could be as small as 0

Explanation:

The Sacrifice Rate is the loss of output due to the fight against inflation, and can be expressed as how much product is lost to reduce inflation by 1 percentage point. The Sacrifice Rate is a proposition by economist Robert Lucas Jr, who noted that the slowdown in long-term inflation is associated with a reduction in the production of goods and services over a period of time until economic agents adapt to the new reality. pricing and restructuring their expectations of the economy. Therefore, the social cost of fighting inflation is a reduction in GDP and an increase in the unemployment rate.

Because of this, we can conclude that if policymakers are committed to reducing inflation and rational people understand this commitment and quickly reduce their inflation expectations, the sacrifice rate can be as low as 0.