Analyse how an increase in wages could cause inflation.

Higher wages may increase consumer expenditure increasing aggregate demand - diagram showing aggregate demand increasing. This causes demand-pull inflation if demand rises by more than money supply and the economy is at, or near, full capacity. Higher wages may increase costs of production which decreases aggregate supply -diagram showing aggregate supply decreasing. This causes cost push inflation if wages rise by more than productivity and may cause a wage price spiral.

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Answered by Karishma B. Economics tutor

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