What is the wage-price spiral?

• A. When higher wages lead to higher prices
• B. When unemployment increases
• C. When higher prices reduce wages
• D. When government imposes price caps

Answer: (A)

The wage-price spiral is a process where increases in wages raise production costs for firms, so they raise prices to maintain margins. Those higher prices raise the cost of living, which prompts workers to demand even higher wages, starting the cycle again. This is why the idea that higher wages lead to higher prices is the essence of the spiral. It isn’t about unemployment rising, it isn’t about price caps, and it isn’t about prices reducing wages; those describe different situations.