Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What term describes a scenario where inflation becomes a permanent feature due to people's expectations?

1. Frictional unemployment

2. Demand-pull inflation

3. Wage-price spiral

4. Real wage unemployment

The correct answer is: Wage-price spiral

The term that describes a scenario where inflation becomes a permanent feature due to people's expectations is "wage-price spiral." This phenomenon occurs when employees begin to expect higher inflation in the future and, in response, demand higher wages. When wages increase, businesses face higher labor costs and may pass these costs to consumers in the form of higher prices for goods and services. This, in turn, reinforces the initial expectation of inflation, leading to a continuous cycle of wage increases followed by price increases. This cycle illustrates how expectations can sustain inflation over time, making it a persistent feature of the economy rather than a temporary fluctuation. As long as there are expectations for higher inflation, the cycle perpetuates itself, ultimately becoming deeply ingrained in the economy's structure. This context is essential for understanding the dynamics of inflation and the interaction between labor costs and pricing strategies.