Why divide rather than subtract for real wages?

Subtraction is only an approximation; once prices rise each dollar buys less, so the nominal figure must be deflated.

Why is the long-run Phillips curve vertical?

Wage and price expectations fully adjust, so unemployment returns to its natural rate and only inflation changes.

S5 Economics Inflation and Unemployment, Paper 1: real wages, misery index and the trade-off

2026-11-02

Ten graded items on real wages, the misery index, stagflation, the Phillips curve, index changes and the sacrifice ratio, each with an answer.

Focus　Deflate instead of subtracting, add the two rates for the misery index, keep the trade-off short-run and divide cost by the fall.

01　Paper details (check answers afterwards)

Item	Detail
Questions	10
Suggested time	25
Difficulty mix	Foundation 4 · Intermediate 3 · Challenge 2 · Error redo 1
Chapter	Chapter: S5 Economics: Inflation and Unemployment
Level	Four basic, three advanced, two challenge and one error-repair item

02　Questions (10 items)

FoundationNominal wages rise 8% and inflation is 5%. Find the real wage growth.
FoundationInflation is 3% and unemployment 6%. What is the misery index?
FoundationWhat is it called when high inflation and high unemployment occur together?
FoundationWhat relationship does the short-run Phillips curve show between inflation and unemployment?
IntermediateThe price index rises from 150 to 162 over two years. Find the cumulative inflation.
IntermediateThe labour force is 4.00 million and unemployment is 6%. How many are employed?
IntermediateA salary is $20 000 a month and prices rise 4%. What is it worth in old prices?
ChallengeOver three years nominal wages rise 10% while prices rise 12%. Find the change in real wages.
ChallengeUnemployment falls by one percentage point while inflation rises by two. What is the sacrifice ratio?
Error redoError repair: a student writes that inflation always lowers unemployment. What is wrong?

03　Answers and one-line notes

#	Answer	One-line note
1	About 2.86%	1.08 over 1.05 minus 1 gives 0.0286.
2	9	The misery index adds the two rates, so 3 plus 6 is 9.
3	Stagflation	Stagflation is stagnation and high unemployment together with rising prices, which leaves policy makers torn.
4	A trade-off: one falls as the other rises	The short-run curve slopes down, so lower unemployment usually costs higher inflation.
5	8%	The 12-point rise over the base of 150 gives 0.08.
6	3.76 million	Unemployment is 0.24 million, so employment is 400 minus 24, or 3.76 million.
7	About $19 230.77	Deflating 20 000 by 1.04 gives 19 230.77 in old prices.
8	About 1.79% lower	1.10 over 1.12 minus 1 is minus 0.0179, a small real fall.
9	2	The sacrifice ratio is the inflation cost over the fall in unemployment, so 2 over 1 is 2.
10	There is no stable long-run trade-off; both can rise together in stagflation	The Phillips trade-off holds only in the short run; once expectations adjust, both can worsen together as in stagflation.

04　What to do after marking

After marking, redo only the wrong items and write down which step went wrong (formula, unit, or misread number).
Repeat the same item two days later; move to the next paper only when both attempts are correct.
Parents only need the answer and note columns; there is no need to explain every item.

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