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Do higher wages cause higher prices, or do price rises cause wage rises?
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Do higher wages cause higher prices, or do price rises cause wage rises? Do higher wages cause higher prices, or do price rises cause wage rises? What are the policy implications in either case? Inflation involves changes in both prices and wages, and can be initially caused by either. Therefore, in this essay I will look at two cases of inflation, one which is caused by a change in aggregate demand, and one which is caused by a change in aggregate supply. Both of these will have relation to prices and wages. I will then examine the fiscal and monetary policy responses available to government in either case. In the first case, a rise in aggregate demand could lead to inflation. This kind of inflation is referred to as demand-pull inflation. An initial increase in the level of aggregate demand could be caused, for example, by a rise in government spending....
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