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A wage-price spiral is a macroeconomic feedback loop where an initial increase in wages leads to a subsequent increase in the price level, which in turn prompts further wage increases, and so on. This self-perpetuating cycle can also be initiated by an initial rise in the price level.

Definition of a Wage-Price Spiral

A reduction in competition within the market for goods and services is classified as a type of inflationary supply shock. This condition can initiate a persistent wage-price spiral, particularly if there is no government policy to counteract it.

Weak Competition as an Inflationary Supply Shock

Based on the scenario provided, identify the specific macroeconomic phenomenon occurring and explain the key mechanism that makes it self-perpetuating.

Analyzing Economic Events in Econland

A national union successfully negotiates a significant, economy-wide increase in nominal wages for its workers. Explain the chain of events that could cause this single action to develop into a self-perpetuating cycle of rising wages and prices.

Analyzing the Wage-Price Feedback Loop

An economy is experiencing a period of rising inflation. Arrange the following events to illustrate the typical sequence of a self-perpetuating wage-price spiral, starting from an initial demand for higher pay.

An economy experiences a widespread increase in nominal wages. In the months that follow, a series of interconnected events unfolds. Which of the following sequences best analyzes the mechanics of a self-perpetuating wage-price spiral that could result from this initial event?

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