What is cost-push inflation primarily caused by?

What is cost-push inflation primarily caused by?

• A. Decreases in aggregate demand
• B. Increases in short-run aggregate supply
• C. Increases in aggregate demand
• D. Decreases in short-run aggregate supply

Answer: (D)

Cost-push inflation occurs when the overall price levels rise due to increases in the costs of production and not necessarily due to increased demand for goods and services. When there are decreases in short-run aggregate supply, it generally means that production is less than it could be at full capacity, often due to rising input costs such as wages, raw materials, and other production-related expenditures. As these costs increase, businesses may pass on these higher costs to consumers in the form of higher prices, leading to inflation. Understanding this mechanism is key; cost-push inflation is not driven by consumer demand but rather by the decreasing capability of suppliers to produce goods at previous levels without raising prices. Therefore, the logic behind cost-push inflation is firmly rooted in the supply side factors affecting production costs and their resulting influence on market prices.

Cost-push inflation occurs when the overall price levels rise due to increases in the costs of production and not necessarily due to increased demand for goods and services. When there are decreases in short-run aggregate supply, it generally means that production is less than it could be at full capacity, often due to rising input costs such as wages, raw materials, and other production-related expenditures. As these costs increase, businesses may pass on these higher costs to consumers in the form of higher prices, leading to inflation.

Understanding this mechanism is key; cost-push inflation is not driven by consumer demand but rather by the decreasing capability of suppliers to produce goods at previous levels without raising prices. Therefore, the logic behind cost-push inflation is firmly rooted in the supply side factors affecting production costs and their resulting influence on market prices.