Q. It is related to adaptive expectations, where people expect current inflation rates to continue in the future. As the price of goods and services rises, workers think that they will continue to rise in the future and demand more costs or wages to maintain their standard of living. Their increased wages result in a higher cost of goods and services, and this wage-price spiral continues as one factor induces the other and vice-versa.

Which of the following phenomena has been described in the above excerpt?

Built-in inflation

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Demand-pull inflation

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Cost-push inflation

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Stagflation

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Solution

The correct option is A Built-in inflation
Explanation:

Built-in inflation is a type of inflation that results from events in the past and persists in the present. It is one of three major determinants of the current inflation rate. According to Robert J. Gordon's triangle model of inflation, the current inflation rate equals the sum of demand-pull inflation, cost-push inflation, and built-in inflation. Built-in inflation is related to adaptive expectations where people expect current inflation rates to continue in the future. As the prices rise, workers expect that they will continue to rise in the future at a similar rate and demand more wages to maintain their standard of living. The increased wages result in a higher cost of goods and services, and this wage-price spiral continues as one factor induces the other and vice-versa.

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