Chapter 10: Problem 312

Suppose the government decides that in order to fight inflation, labor unions will not be allowed any wage increases until further notice. What type of inflation would this be aimed at?

Short Answer

Expert verified

The government is aiming to fight cost-push inflation by freezing wage increases for labor unions until further notice. This is because it helps to control the rising costs of production, specifically labor costs, preventing businesses from raising their prices to cover the increased labor costs.

Step by step solution

Understand Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. It is typically measured by the Consumer Price Index (CPI) or the Producer Price Index (PPI). There are two main types of inflation: demand-pull inflation and cost-push inflation.

Define Demand-Pull Inflation

Demand-pull inflation occurs when the demand for goods and services exceeds the supply, causing prices to increase. This type of inflation is usually associated with a rapidly growing economy or a boom, as consumers have more disposable income to spend on goods and services, causing demand to outpace supply.

Define Cost-Push Inflation

Cost-push inflation occurs when the costs of production for goods and services increase, leading to a decrease in supply at the existing price level. Businesses have to raise their prices to cover the increased costs, resulting in inflation. This type of inflation can result from increased labor costs, higher import prices, or monetary policies that increase the costs of goods and services.

Determine the Type of Inflation the Government is Trying to Fight

By freezing wage increases for labor unions, the government aims to control the rising costs of production, specifically labor costs. This in turn would help to prevent businesses from raising their prices to cover the increased labor costs. Therefore, we can conclude that the government is trying to fight cost-push inflation in this case. So, the type of inflation the government is aiming to fight by freezing wage increases for labor unions until further notice is cost-push inflation.

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