Question
Because of low unemployment rates in the country, employers offer higher wages. To meet their higher payroll costs and maintain profits, they charge consumers more for goods and services. What are the likely consequences?
a prolonged period of deflation
increasing numbers of people living on a fixed income
demand-pull inflation
a wage-price spiral of ever-increasing prices
Answers
GPT-4o mini
The scenario described is likely to result in **a wage-price spiral of ever-increasing prices**. Here's how it works:
1. **Higher Wages**: Employers increase wages in response to low unemployment, making it harder for them to find workers.
2. **Increased Costs**: As payroll costs rise, employers need to cover these expenses, which often leads them to raise prices on goods and services.
3. **Inflationary Pressure**: As prices increase, consumers may demand higher wages to maintain their purchasing power, prompting employers to raise wages again.
4. **Cycle Continues**: This cycle can create a wage-price spiral where wages and prices continuously push each other higher, leading to sustained inflation.
While **demand-pull inflation** can also occur due to increased consumer purchasing power resulting from higher wages, the direct cycle of wage increases leading to price increases fits the description of a wage-price spiral more closely.
The other options, such as **a prolonged period of deflation** and **increasing numbers of people living on a fixed income**, are less likely as they do not directly relate to the dynamics of wage and price increases in the context provided.
1. **Higher Wages**: Employers increase wages in response to low unemployment, making it harder for them to find workers.
2. **Increased Costs**: As payroll costs rise, employers need to cover these expenses, which often leads them to raise prices on goods and services.
3. **Inflationary Pressure**: As prices increase, consumers may demand higher wages to maintain their purchasing power, prompting employers to raise wages again.
4. **Cycle Continues**: This cycle can create a wage-price spiral where wages and prices continuously push each other higher, leading to sustained inflation.
While **demand-pull inflation** can also occur due to increased consumer purchasing power resulting from higher wages, the direct cycle of wage increases leading to price increases fits the description of a wage-price spiral more closely.
The other options, such as **a prolonged period of deflation** and **increasing numbers of people living on a fixed income**, are less likely as they do not directly relate to the dynamics of wage and price increases in the context provided.