Price expectations can affect wages because whenemployers and employees expect higher prices, workers will bargain...

Price expectations can affect wages because when employers and employees expect higher prices, workers will bargain for higher wages and employers are more likely to agree to higher wages

A) TRUE

B) FALSE

Expert Solution

Answer is " TRUE "

If firms and consumers expect future inflation then it can become a self fulfilling prophecy. If workers expect future inflation, they are more likely to bargain for higher wages to compensate for the increased cost of living. If workers can successfully bargain for higher wages, this will contribute towards inflation.

Also if firms expect high prices of raw materials in future, they will also increase prices to protect their profit margins.

Thus a wage-price spiral is caused here. The increased wage burden causes businesses to increase their prices of products and services.

Rahul Sunny answered 2 years ago

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