sacrifice ratio
sacrifice ratioThe ratio between the amount of unemployment needed to reduce inflation and the reduction achieved. According to demand inflation models, a 1 per cent increase in demand when activity is high has more effect in increasing inflation than a 1 per cent fall in demand has in decreasing inflation when activity is low. It is therefore believed that the sacrifice ratio for any economy will be lower if disinflationary pressure is applied steadily than if the economy varies between spells of expansionary policy and occasional bursts of severe cuts in effective demand. It is also believed that the sacrifice ratio will be lower if the authorities' commitment to reducing inflation is regarded as credible.
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