PRC-3 · Chapter 18 · Question 10 of 33
A powerful labor union forces management to increase wages by 20% without any corresponding increase in labor productivity. How does this act specifically contribute to the inflation cycle?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) It causes a wage-price spiral (cost-push inflation) as the firm raises product prices to cover the new wages
Explanation
A wage-price spiral is a classic cause of cost-push inflation. Higher wages increase production costs, forcing firms to raise prices, which prompts workers to demand even higher wages.
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