To calculate the percentage reduction in price, we use the formula:

$\text{Percentage Reduction} = \frac{\text{Original Price} - \text{New Price}}{\text{Original Price}} \times 100$

Here, the original price of the sweater is $20, and the new price is $12. Substituting these values:

$\text{Percentage Reduction} = \frac{20 - 12}{20} \times 100 = \frac{8}{20} \times 100 = 0.4 \times 100 = 40\%$

Thus, the price of the sweater was reduced by 40%.

The correct answer is D. 40%.

Would you like more details on how this formula works or have any questions? Here are 5 related questions to deepen understanding:

1. How would you calculate the percentage increase if the price had risen from $12 to $20?
2. What would be the percentage reduction if the price had dropped from $50 to $30?
3. How can you reverse the percentage reduction to find the original price given the reduced price?
4. If the price was reduced by 20%, what would the new price be starting from $20?
5. How do you calculate the percentage change if the original and new prices are given in a foreign currency?

Tip: Always ensure to divide by the original price when calculating percentage reduction, as it gives the correct base for comparison.