Question

What is the possible consequence of the following scenario? Because of high unemployment rates in the country of Lavernia, employers offer higher wages. To meet their higher payroll costs and maintain profits, they charge consumers more for goods and services.
a. a prolonged period of deflation
b. demand-pull inflation
c. a wage-price spiral of ever-increasing prices
d. increasing numbers of people living on a fixed income

Answer 1

Answer:

c. a wage-price spiral of ever-increasing prices.

Explanation:

The wage-price spiral is a type of economic assertion that explains the cause and effect of wage hike in an economy.

Wage-price spiral tells that increase in wage will lead to more disposable income i.e. individuals have more money to spend and as such, increase in demand for good and services which in turn leads to an increase in price of goods and services.

This explains the spiral relationship, increase in wages means increase in income which leads to increase in demand and this leads to increase in price of goods and services and employers will in turn demand for increase in wages and the cycle continues.