Does lower inflation mean falling prices?

No, the index can still rise, just more slowly, as when it moves from 156 to 160.

How is the sacrifice ratio used?

Divide the inflation points to be removed by the extra point-years of unemployment; a larger ratio means costlier disinflation.

S5 Economics Inflation and Unemployment, Paper 4: the Phillips curve and wage bargaining

2026-11-02

Tutor Prep Guide · Primary English

The short-run trade-off comes from the Phillips curve while the long run is set by the natural rate, and wage bargaining depends on real rather than nominal gains.

Focus　Separate the short run from the long run, then convert every nominal change into a real one before comparing.

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 5.5% and unemployment is 5.0%. Find the misery index.
FoundationNominal wages rise 5% while inflation is 1.5%. Find the change in real wages.
FoundationUnemployment rises from 4% to 6.5% and the sacrifice ratio is 2.5. Find the fall in inflation in percentage points.
FoundationThe natural rate is 4.5% and actual unemployment is also 4.5%. What happens to inflation?
IntermediateExpected inflation is 3% but actual inflation is 6%, while nominal wages rise only 3%. Find the change in real wages.
IntermediateOn a short-run Phillips curve inflation is 2% at 6% unemployment and 6% at 4% unemployment. Find inflation at 5% unemployment.
IntermediateInflation falls from 9% to 3% while unemployment stays 3 points above the natural rate for two years. Find the sacrifice ratio.
ChallengeInflation equals 8% minus 1.5 times (unemployment minus 4%). Find inflation at 6% and at 8% unemployment.
ChallengeUnions win a 7% nominal wage rise and inflation turns out to be 6%. Find the change in real wages.
Error redoThe index rises from 150 to 156 and then to 160. A student sees the second-year rate of 2.56% and concludes prices fell. Give the correct conclusion.

03　Answers and one-line notes

#	Answer	One-line note
1	10.5	The misery index adds inflation to unemployment, so 5.5 plus 5.0 is 10.5.
2	About 3.45%	1.05 divided by 1.015, minus 1, gives 3.45%.
3	6.25 percentage points	The sacrifice ratio times the rise in unemployment, 2.5 times 2.5, gives 6.25 points.
4	It stays stable, neither accelerating nor decelerating	When actual unemployment equals the natural rate, expectations match reality and inflation stays stable.
5	A fall of about 2.83%	1.03 over 1.06 minus 1 is a fall of 2.83%, as workers underestimated prices.
6	4%	Each percentage point less unemployment adds 2 points of inflation, so 5% unemployment goes with 4% inflation.
7	1.0	Inflation falls 6 points while excess unemployment is 3 points for two years, that is 6 point-years, so 6 over 6 is 1.0.
8	5% and 2%	At 6% unemployment the gap is 2 points, so 8 minus 3 is 5, and at 8% the value is 8 minus 6, which is 2.
9	About 0.94%	1.07 over 1.06 minus 1 gives 0.94%, so prices absorbed almost the whole claim.
10	Prices still rose, by 6.67% over the two years	Lower inflation is not falling prices; the index still rises from 156 to 160, which is 6.67% over two years.

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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