If salaries go up, what tends to rise as well?

• A. Inflation and interest rates
• B. Unemployment
• C. Productivity only
• D. None of the above

Answer: (A)

Rising salaries boost workers’ purchasing power, which tends to lift demand for goods and services. When demand grows faster than the economy can supply, prices tend to rise, creating inflation. As inflation moves higher, central banks usually respond by tightening monetary policy, which shows up as higher interest rates. Productivity isn’t guaranteed to rise with wages, and unemployment doesn’t have a simple, direct upward or downward move in this scenario; wage increases can occur even without corresponding productivity gains, and unemployment is influenced by many other factors. So the combination most likely to accompany higher salaries is inflation and higher interest rates.