Answer to Question #128618 in Macroeconomics for Juanita kumah

Question

Critically analyse how an increase in wages can lead to cost- push inflation as well as demand-pull inflation

Answer 1

Increase in wages can lead to cost-push inflation i.e when there is increased labor costs, the basic wage increases for production workers due to a rise in the minimum wage per worker.

Increase in wages can lead to demand-pull inflation; as firms produce more, they employ more workers, creating increase in employment . This increased demand for workers puts upward pressure on wages, leading to wage - push inflation. The higher wages increase the disposable income of workers leading to a rise in consumer spending.