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S5 Economics Inflation and Unemployment, Paper 2: expectations and the long run
S5 Economics Inflation and Unemployment, Paper 2: expectations and the long run
Ten graded items on the misery index, real wages, movements along the Phillips curve, the natural rate, the sacrifice ratio, unanticipated inflation and the vertical long-run curve.
Focus The trade-off is short-run, surprises create real effects, and the long-run curve is vertical at the natural rate.
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)
- FoundationInflation is 6% and unemployment is 4.5%. Find the misery index.
- FoundationNominal wages rise 7% while prices rise 2%. Find the rise in real wages.
- FoundationThe short-run Phillips curve slopes downward. How does the economy move when unemployment falls?
- FoundationWhat happens to inflation when actual unemployment equals the natural rate?
- IntermediateInflation must fall from 8% to 3% at a cost of 2 percentage points more unemployment. Find the sacrifice ratio.
- IntermediateWorkers settle for a 3% rise based on expected inflation, but actual inflation is 5%. Find the change in real wages.
- IntermediateWhat is the shape of the long-run Phillips curve and what does expansionary policy achieve in the long run?
- ChallengeThe economy moves from 5% inflation with 7% unemployment to 7% with 5%. How do the misery index and the mix change?
- ChallengeInflation falls from 10% to 4% with a sacrifice ratio of 3. How much must unemployment rise, and what is the output loss if each point costs 2% of output?
- Error redoError repair: a student writes that lower unemployment always requires higher inflation. What is wrong?
03 Answers and one-line notes
| # | Answer | One-line note |
|---|---|---|
| 1 | 10.5 | The misery index adds inflation and unemployment, so 6 plus 4.5 is 10.5. |
| 2 | About 4.90% | 1.07 over 1.02 minus 1 is 0.049, so real wages rise about 4.90%. |
| 3 | Up and to the left along the curve, with higher inflation | Unemployment is on the horizontal axis and inflation on the vertical, so less unemployment means left and higher inflation means up. |
| 4 | Inflation is stable and does not accelerate | At the natural rate the labour market is in balance, so wage and price pressure is stable and inflation stops accelerating. |
| 5 | 2.5 | The 5 point fall in inflation divided by the 2 point rise in unemployment gives 2.5. |
| 6 | About 1.90% lower | 1.03 over 1.05 minus 1 is minus 0.019, so unanticipated inflation erodes real wages. |
| 7 | It is vertical at the natural rate, so policy only raises inflation | In the long run expectations fully adjust and unemployment returns to its natural rate, so the curve is vertical and policy only raises inflation. |
| 8 | The index stays at 12 but inflation is higher, so the mix is worse | Both add to 12 so the index is unchanged, yet inflation rises from 5% to 7% and brings larger distortion costs. |
| 9 | Unemployment rises 2 points and output falls about 4% | Six points divided by 3 gives 2 points of unemployment, and times 2% that is a 4% output loss. |
| 10 | The trade-off is short-run only; supply-side policy can lower the natural rate without inflation | The trade-off is short-run only, and the long-run curve is vertical; better matching and training lower the natural rate without higher inflation. |
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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