The inflationary spiral explains the causes and effects of high inflation. the spiral usually begins with an increase in demand. what is the direct effect of this increase? a) producers raise prices to continue to make a profit. b) the government prints more money, lowering the value of money. c) workers negotiate with employers to receive more money. d) consumers need higher wages to keep up with rising prices.

Answer

The Inflationary spiral begins with an increase in demand that will make producers raise prices to continue to make a profit.

Explanation

The Wage-Price Spiral explains the cause effect relation between rising prices and rising wages .According to W-P spiral, the increasing wages raise the disposable income causing the demand of goods to increase thus making prices to rise higher. When prices for goods keep on rising, the demand for higher wages will also increase causing higher costs of production on producers who will shift this pressure on the prices.

The option A is correct.

In the inflationary spiral, the spiral usually begins with an increase in demand, the direct effect of this increase is that producers raise prices to continue to make a profit.  

Further Explanation:

Inflationary spiral:

The inflationary spiral means the situation in which the prices are increased in a short period of duration. Inflation means the prices are hiked up from the current market prices. In the case of Inflationary spiral, the effect of a rise in demand will affect the producers' raise prices of the product to continue to make a profit. It will automatically increase prices of all over the products available in the market.

Justification for the correct and incorrect

A.  

Producers raise prices to continue to make a profit: This option is correct.

When the demand for the product is increased, the producers raise the prices of the product, so that they can reap the profits from the market. This is the correct statement.  

B.

The government prints more money to lowering the value of the money: This option is incorrect.

When the demand for the product is increased, the government prints more money. In this case, the money is increased in the market; it rises up the value of the money. This statement is incorrect.  

C.

Workers negotiate with employers to receive more money: This option is incorrect.

This statement is incorrect. If the product demand is increased, the producers employ more workers to increase the production of the product. There is no point in negotiating with employers.

D.

Consumer needs higher wages to keep up with rising prices: This option is incorrect.

Government employees can demand higher wages at the time of inflation. But all consumersdoes not have the government job. This option is incorrect.  

Learn more:

1.Learn more about risk-free rate

2.Learn more about inflation

3.Learn more about the inflation rate and economy

Answer details:

Grade: High School

Subject: Economics

Chapter: Inflationary spiral

Keywords:Inflationary spiral, causes, high inflation, increased demand, producers, raise the price, continue, profit, government, prints more money, lowering the value of money, workers, negotiate, employers, consumers, higher wages, rising up prices.  

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