HISET Social Studies Practice

What does an inflationary spiral refer to?

1. The slow decrease in prices leading to higher production

2. The rapid increase in wages due to decreased consumer demand

3. The cycle of rising prices and wages due to heightened demand

4. The stabilization of prices despite increased costs

The correct answer is: The cycle of rising prices and wages due to heightened demand

An inflationary spiral refers to a situation where rising prices lead to increased wages, which in turn drives prices even higher, creating a continuous cycle of inflation. This phenomenon typically occurs in an economy that is experiencing heightened demand, where consumers are willing to pay more for goods and services. As the cost of living rises due to inflation, workers demand higher wages to maintain their purchasing power. When businesses respond to higher labor costs by raising prices, it intensifies the inflationary cycle. The context surrounding the other options clearly illustrates why they do not capture the essence of an inflationary spiral. A slow decrease in prices would not create the conditions necessary for an inflationary cycle. Rapid increases in wages due to decreased consumer demand would not typically lead to an inflationary environment. Lastly, stabilization of prices despite increased costs suggests a lack of inflation, which contradicts the fundamental notion of an inflationary spiral.