In order to prevent a wage- price spiral from emerging when the economy is producing above full employment, the monetary authority could:
A) contract the money supply.
B) lower taxes.
C) expand the money supply.
D) increase government spending.

Question

Quizplus · Accepted Answer

When the economy is producing above full employment, there is a risk of inflation due to increased demand for goods and services leading to higher prices. Contracting the money supply through actions such as increasing interest rates or reducing government spending can help control inflation and prevent a wage-price spiral from emerging. Lowering taxes or increasing government spending, on the other hand, can further stimulate demand and exacerbate inflationary pressures.

In Order to Prevent a Wage- Price Spiral from Emerging