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Question:


lizbethortiz
Student
High School - 12th Grade

If government uses its stabilization policies to maintain full employment under conditions of cost-push inflaton:

It could be one of these answers:

A) a deflationary spiral is likely to occur

B) an inflationary spiral is likely to occur

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Posted by lizbethortiz on Thursday November 27, 2008 at 8:43 AM and tagged with business, macroeconomics.

Answers:


  1. enotechris Teacher
    Vocational

    eNotes Editor

    Cost-push inflation is the result of the increase in the cost of raw materials, and/or and increase in wages paid. However, both of these factors, materials and wages, either singularly or in concert, if increasing in cost, tend to decrease the quantity of labor employed, or in other words, increase unemployment.

    So if the cost of materials and wages are beyond governmental regulation, then the only variable is the amount of employment/unemployment;  government attempting full employment will firstly, not reach the goal of full employment, secondly, will result in lower wages for those employed, and thirdly, will tend to cut production.  Cutting production will lessen demand for materials, decreasing their cost.

    Therefore, with both wages and cost of materials decreasing, a deflationary spiral may result.

    Alternatively, if government attempts to regulate cost of material and wages (as the US attempted in the early 1970's) and keep costs artificially low, employment and possibly wages will initially increase, but real material costs will increase faster via demand-pull inflation, and an inflationary spiral results.

    Sources:
    http://economics.about.com/cs/money/a/inflation_terms.htm

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    Posted by enotechris on Thursday November 27, 2008 at 10:16 AM