economics hard MCQ

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

  1. The percentage of foreign exchange reserves lost defending a currency peg
  2. The cumulative loss in GDP required to reduce the inflation rate by 1 percentage point
  3. The ratio of direct tax revenue sacrificed due to corporate tax cuts
  4. The difference between the Repo Rate and the Reverse Repo Rate

Answer: The cumulative loss in GDP required to reduce the inflation rate by 1 percentage point

When a central bank aggressively hikes interest rates to crush inflation, it deliberately depresses aggregate demand, which inevitably causes a slowdown in output and a rise in unemployment. The Sacrifice Ratio quantifies the exact macroeconomic 'pain' or lost economic output a nation must endure to achieve a permanent reduction in the underlying rate of inflation.

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