| As buyers and sellers become aware of the pattern of rising prices and extrapolate from this experience into the future, they begin to expect still higher prices. This anticipation gives rise to the so-called "wage-price spiral" of inflation, illustrated in the diagram. (The term is somewhat redundant, since a "wage" is a special case of a "price," namely, the price of a particular kind of labor.) The plus signs indicate the positive-feedback loops (cf. 4.6:18, including the "Details" box) that generate and intensify the "spiral" effect.
Because of the law of diminishing marginal utility, the inflationary money, as it circulates through the economy, leads individuals to attach less marginal utility to each money unit (versus units of other goods) on their value scales. This lower valuation results directly in increased demands for all other goods purchased with money, and decreased supply of goods sold for money (cf. p. 4.6:34).  |
|
 |
Previous
