Exam 22: The Short Run Trade Off Between Inflation and Unemployment: Part A

Some countries have inflation around or in excess of 8 percent. Suppose that the sacrifice ratio is 2.5. What is the cost of reducing inflation from 8 percent to 2 percent? In your answer, define the sacrifice ratio and explain how you found the cost of inflation reduction.

A central bank raises the money supply growth rate and keeps it higher. As the economy moves from the short-run equilibrium created by the increase in the money supply growth back to long-run equilibrium what happens to the unemployment rate?