Question

The inflationary spiral explains the causes and effects of high inflation. The spiral usually begins with a rise in production costs. What is the direct effect?
A)Producers raise prices to continue to make a profit.
B)The government prints more money and lowers its value.
C) Workers negotiate with employers to receive more money.
D) Consumers need higher wages to keep up with rising prices

Answer 1

Answer:

A)Producers raise prices to continue to make a profit.

Explanation:

The inflationary spiral is the effect that the rise on average prices of production costs produces on the economy, after that rise on the production costs, producers rise the final cost of the product in order to mantain a reasonable profit on the sell of the products and this starts the inflationary spiral.

Answer 2

The direct effect of an increase in production costs is that the producers will raise their prices in order to continue to make profits.  

Further explanation:

The producers respond immediately to changes in any variable that affects their profits. An increase in production costs as the beginning of the inflationary spiral will reduce the profits of the firms. As a result, the producers will respond immediately to this by increasing the prices they charged in order to continue to make a profit.

Justification for the correct and incorrect answer:

A) Producers raise prices to continue to make a profit: This option is correct.

As a result of a rise in the production costs in the inflationary spiral, the profits of the producers will lower down. The producers will respond immediately to it by increasing the prices so as to continue to make a profit.

B) The government prints more money and lowers its value: This option is incorrect.

The government will use measures to control inflation in the form of printing more money when inflation actually occurs not before the inflation. The rise in the production costs would not induce the government to start printing more money and lowers its value.

C) Workers negotiate with employers to receive more money: This option is incorrect.

The workers attempts to negotiate with employers to get more money when the prices of goods rise. With an increase in prices, the workers' nominal wages lower down and thus, they demand higher wages. An increase in the production costs would not induce the workers to negotiate with employers for a higher nominal wage.

D) Consumers need higher wages to keep up with rising prices: This option is incorrect.

The workers will surely need higher wages in order to keep up with the rising prices. But, the need of consumers for higher wages will not be a direct impact of a rise in production costs as the prices have not increased yet.  

Therefore, producers will raise their prices in order to make profits as a direct effect of a rise in production costs.

Learn more:

1. Learn more about inflation

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2. Learn more about the inflation rate and economy

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3. Learn more about monetary policy

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Answer details:

Grade: High School

Subject: Economics

Chapter: Inflation and its effects

Keywords: inflationary spiral, explains the cause, and effects, of high inflation, spiral usually begins, a rise in production costs, direct effect, producers raise prices, to continue, make a profit, the government, prints more money, workers negotiate with employers, consumers need higher wages.