Principles of Economics- Mankiw (5th) 773

Principles of Economics- Mankiw (5th) 773 - CHAPTER 34 F I...

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CHAPTER 34 FIVE DEBATES OVER MACROECONOMIC POLICY 799 large. Estimates of the sacrifice ratio suggest that reducing inflation by 1 percent- age point requires giving up about 5 percent of one year’s output. Reducing infla- tion from, say, 4 percent to zero requires a loss of 20 percent of a year’s output. At the current level of gross domestic product of about $9 trillion, this cost translates into $1.8 trillion of lost output, which is about $6,500 per person. Although people might dislike inflation, it is not at all clear that they would (or should) be willing to pay this much to get rid of it. The social costs of disinflation are even larger than this $6,500 figure suggests, for the lost income is not spread equitably over the population. When the econ- omy goes into recession, all incomes do not fall proportionately. Instead, the fall in aggregate income is concentrated on those workers who lose their jobs. The vulnerable workers are often those with the least skills and experience.
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