If expectations of inflation are formed rationally, the sacrifice ratio for an unexpected

b. is bigger than the sacrifice ratio for an expected change in the money supply

Explanation:

If expectations of inflation are formed rationally, the sacrifice ratio for an unexpected change in the money supply is bigger than the sacrifice ratio for an expected change in the money supply.

The sacrifice ratio is an economic ratio which aims to measures the effect of rise and fall of inflation on the country's total production and output. When prices fall, companies are less incentivized to produce goods and may cut back on production. If people do form their expectations rationally, then the inflation inertia will be less intense than it appeared initially. But, if unexpected change happens (i.e. like an unexpected change in the money supply), then inflation inertia will be more intense. Therefore, the change in sacrifice ratio would be bigger.

Corrective taxes are levied on per unit basis, it could be dollars per ton of pollution, so those who can reduce pollution at a lower cost than taxes would reduce pollution and don't pay taxes. Those firms who can't reduce pollution at lower cost than the tax will pay taxes and pollute the environment. It effectively puts a price over rights of pollution.

Tradable pollution permits are efficient because those forms who can reduce pollution at lower cost will do that and trade those rights to the firms who can't reduce at lower cost. They would do this trade for a price they mutually agree to. In this way both the firms are better off and leads to socially efficient outcomes.

Explanation: