What is the sacrifice ratio?

The percentage of output given up to cut inflation by one percentage point; a larger ratio means a costlier disinflation.

Why does stagflation happen?

A supply shock raises costs and unemployment together, shifting the short-run curve to the right.

S5 Economics Inflation and Unemployment, Paper 3: sacrifice ratio, expectations and stagflation

2026-11-02

Tutor Prep Guide · Primary English

In the short run inflation and unemployment can trade off, but expectations and supply shocks can push both up together.

Focus　Separate actual from expected inflation, then convert the cost with the sacrifice ratio.

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	S5

02　Questions (10 items)

FoundationInflation is 4.5% and unemployment is 6.5%. Find the misery index.
FoundationNominal wages rise 10% and inflation is 4%. Find the rise in real wages.
FoundationThe consumer price index rises from 125 to 130. Find the inflation rate.
FoundationThe labour force is 5.0 million with 350 000 unemployed. Find the unemployment rate.
IntermediateThe sacrifice ratio is 3 and unemployment falls from 7% to 5%. Find the output loss as a share of one year of GDP.
IntermediateWages are set on expected inflation of 2% while actual inflation is 5%. Find the change in real wages.
IntermediateThe natural rate is 5% and the actual rate is 6%. Find cyclical unemployment.
ChallengeInflation is cut from 10% to 4% over two years with a sacrifice ratio of 2. Find the cumulative output loss in years of GDP.
ChallengeAn oil shock lifts inflation from 3% to 8% and unemployment from 5% to 7%. Find the rise in the misery index.
Error redoInflation falls from 8% to 3% and a student says prices are now falling. If the index was 108, find its value a year later.

03　Answers and one-line notes

#	Answer	One-line note
1	11	4.5 plus 6.5 is 11.
2	About 5.77%	1.10 divided by 1.04, minus 1, gives 5.77%.
3	4%	5 over 125 is 4%.
4	7%	35 over 500 is 7%.
5	6%	Unemployment falls 2 points, and 2 times the sacrifice ratio of 3 is 6%.
6	A fall of about 2.86%	1.02 over 1.05, minus 1, is minus 2.86%.
7	1 percentage point	Actual minus natural gives 1 percentage point, which is cyclical unemployment from weak demand.
8	About 12%	Inflation falls 6 points, and 6 times 2 is 12%.
9	7 points	The index goes from 8 to 15, a rise of 7 points, which is stagflation.
10	111.24, so prices are still rising	Slower inflation is not deflation: 108 times 1.03 is 111.24, so prices are still higher.

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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