If firms and workers expect prices to rise significantly, they are likely to raise wages and prices by a large amount to keep pace with the expected inflation.

Question

Quizplus · Accepted Answer

This is because workers and firms may anticipate that the cost of living will increase as a result of inflation, and therefore will try to increase wages and prices to maintain their purchasing power. This can lead to a wage-price spiral and further fuel inflation.

If Firms and Workers Expect Prices to Rise Significantly, They