sacrifice ratio

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In Keynesian economics, the ratio between the amount of unemployment needed to reduce inflation and the reduction achieved. According to demand inflation models, an increase in demand when activity is high has more effect in increasing inflation than an equal fall in demand has in decreasing inflation when activity is low. This implies 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. The sacrifice ratio is likely to be lower if the authorities' commitment to reducing inflation is regarded as credible.

Subjects: Economics.

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