A wage- price spiral can occur if an economy is producing at a level above full employment.

Question

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When an economy is already producing at full employment, an increase in wages can lead to an increase in prices, but it is unlikely to lead to a wage-price spiral as there is limited room for further growth in production. However, if an economy is producing above full employment capacity, an increase in wages will increase costs for businesses, which they will pass onto consumers in the form of higher prices, leading to workers demanding even higher wages to maintain their purchasing power, and the cycle continues. This can result in inflation and create economic instability.

A Wage- Price Spiral Can Occur If an Economy Is