A wage-price spiral occurs:
A) when firms need to continually meet higher wage demands because unemployment is close to zero.
B) when falling wages lead to rapidly falling prices, causing deflation.
C) when higher prices lead to rapidly falling real wages, which prompts demands for higher nominal wages.
D) when wages are indexed by law to the CPI.

Question

Quizplus · Accepted Answer

The wage-price spiral occurs when higher prices lead to rapidly falling real wages, which prompts demands for higher nominal wages. This cycle continues, with firms raising prices to cover increasing wage costs, and workers demanding higher wages to keep up with rising prices, leading to a spiral effect.

A Wage-Price Spiral Occurs