WAGE-PRICE SPIRAL

Wage-price spiral is a macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. The wage-price sprial suggests that rising wages increase disposable income, thus raising the demand for goods and causing prices to rise.

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HOW A WAGE-PRICE SPIRAL OCCURS

• When an economy is operating at near full employment and people have money to spend, demand for goods and services increases.

HOW TO STOP IT

• Government has the power to head off a wage-price spiral, However, as history has shown, it must be careful in doing so