Question

Labor demands a higher wage to compensate for inflation, which leads to higher prices, then even higher wages. This is called a wage-price spiral T OR F

Answer 1

The correct answer is TRUE.

The wage-price spiral is a macroeconomic theory that explains the existing causal effects behind sucessive price and wage increases.

This theory states that when there is an increase in wages, the income available for households rises too, leading to a larger demand of goods and services. If the demand-side grows too fast in a market, there is an excess of demand over the amount supplied and the market would adjust itself through a price increase. In this moment employees would demand higher wages to compensate for the inflation and to prevent their money from losing real value , so that they are able to consume the same amount of things with their salary as they could before. If wages increase, production costs for companies increase too and firms are forced to increase the market price of their products again in order to maintain their profit margins.