Suppose that the central bank of a country pursues disinflation during years 2001 and 2002 and, as a consequence, unemployment is larger than u natural (the natural
rate of unemployment) during those two years. Assume that Okun’s Law holds and that u natural is 4%. Use the following information to calculate the sacrifice ratio in
this economy. In year 2000 inflation was 10% and in year 2002 it was 6%. In year 2001 the unemployment rate was 9%, and in year 2002 it was 6%.
Sample Solution
