economics hard MCQ

What is the 'Sacrifice Ratio' in the context of macroeconomic monetary policy?

  1. The amount of foreign exchange reserves lost during a currency crisis
  2. The percentage of GDP lost due to a 1% reduction in the inflation rate
  3. The ratio of direct taxes to indirect taxes in the national budget
  4. The interest rate differential between the Repo Rate and the Bank Rate

Answer: The percentage of GDP lost due to a 1% reduction in the inflation rate

The Sacrifice Ratio measures the real economic cost of disinflation. When a central bank aggressively raises interest rates to crush high inflation, it inevitably depresses aggregate demand, leading to lower output and higher unemployment. This ratio quantifies exactly how many percentage points of annual GDP must be 'sacrificed' to permanently lower the inflation rate by one percentage point.

Topic Macroeconomics - Inflation
Exam Relevance UPSC Prelims, SSC CGL, Banking
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