What type of inflation occurs if workers ask for higher wages and firms must raise product prices to pay their workers?

Question

BlackTom AI · Accepted Answer

This question asks us to identify the inflation type that arises when workers demand higher wages and firms raise prices to cover those wage costs.
Option 1: Demand-pull. This form of inflation happens when overall demand in the economy exceeds supply, pulling prices up. It is not primarily driven by rising wages in response to labor costs, so it doesn’t fit the scenario described.
Option 2: Expectational. Inflation expectations can influence price levels, especially if people expect prices to rise and therefore adjust behavior, but the core trigger in the question is actual wage increases triggering higher costs, not merely expectations about future prices.
Option 3: Cost-push. Here, higher wages raise production costs for firms, who then pass those costs onto consumers in the form of higher prices. The sequence matches the description: workers negotiate higher wages, firms incur higher costs, and prices rise.
Option 4: Composition shift. This term would describe a change in the structure of the economy’s output or industry mix, not a mechanism by which inflation is generated through wage-driven cost increases. It does not capture the wage–cost–price transmission described.
In summary, the mechanism described—wage increases raising costs which are then reflected in higher product prices—maps directly to cost-push inflation, while the other options refer to different inflation drivers or structural shifts.

ECON 2002.01 AU2025 (21333) Midterm Exam 2- Requires Respondus LockDown Browser

What type of inflation occurs if workers ask for higher wages and firms must raise product prices to pay their workers?

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