Final answer:
A wage-price spiral is a cycle in which higher wages lead to higher prices, which can result in inflation and decreased purchasing power. It can also lead to unemployment if businesses cannot afford to pay higher wages.
Step-by-step explanation:
A wage-price spiral is a cycle in which higher wages lead to higher prices, which in turn lead to demands for even higher wages. This cycle can continue indefinitely, causing inflation and eroding the purchasing power of money.
For example, let's say workers negotiate higher wages due to increased demand for their skills. As a result, the cost of production for businesses increases, leading to higher prices for goods and services. In response, workers may demand even higher wages to keep up with the rising cost of living, restarting the cycle.
This wage-price spiral can have negative effects on the economy, including:
- **Inflation**: As wages and prices continue to rise, the general level of prices in the economy increases, leading to higher costs for consumers and businesses.
- **Decreased purchasing power**: When wages do not keep up with inflation, workers' purchasing power decreases. They can buy fewer goods and services with their wages, impacting their standard of living.
- **Unemployment**: If businesses are unable or unwilling to pay higher wages, they may lay off workers or reduce hiring, leading to higher unemployment rates.