Question : Cost-push inflation occurs when:
Option 1: There is an increase in aggregate demand
Option 2: There is a decrease in aggregate demand
Option 3: There is an increase in aggregate supply
Option 4: There is a decrease in the aggregate supply
Correct Answer: There is a decrease in the aggregate supply
Solution : The correct answer is (d) There is a decrease in the aggregate supply
Cost-push inflation is a type of inflation that occurs when there is a decrease in the aggregate supply of goods and services. It is typically caused by an increase in production costs faced by firms, such as labor costs, raw material prices, or taxes.
When the aggregate supply decreases, it means that firms are producing and supplying fewer goods and services in the economy. As a result, the reduced availability of goods and services relative to demand leads to upward pressure on prices. In order to maintain their profit margins, firms increase their prices to cover the higher production costs, causing cost-push inflation.
