Which of the following factors would be most likely to lead to cost-push inflation?

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BlackTom AI · Accepted Answer

Question restated: Which of the following factors would be most likely to lead to cost-push inflation?

Option a: An increase in the global oil price. This directly raises production costs for many goods and services, since oil and energy are key inputs across the economy. Higher input costs shift the short-run aggregate supply (AS) curve to the left, causing higher price levels and lower output, which is characteristic of cost-push inflation.

Option b: An increase in transfer payments to households. Transfer payments increase household income and purchasing power, typically boosting consumer spending. This tends to shift aggregate demand (AD) to the right, generating demand-pull inflation if the economy is near full employment, rather than cost-push inflation mediated by rising production costs.

Option c: An increase in aggregate demand (AD). A rise in AD reflects greater overall demand in the economy, which can push prices up through demand-pull effects, especially when resources are near full capacity. While it raises the price level, the mechanism is demand-driven rather than driven by rising costs of production, so it is not cost-push inflation.

Option d: A decrease in the rates of business taxation. Lower business taxes reduce costs and can incentivize investment and production. This tends to ease cost pressures and/or expand supply, potentially lowering prices or offsetting inflationary pressures, rather than causing cost-push inflation.

In summary, option a describes a rise in production costs (oil prices) that would push costs up and prices up with reduced output, which aligns with cost-push inflation mechanisms. Options b and c emphasize demand-side pressures that raise the price level via higher demand, not via rising costs. Option d reduces costs and can relieve inflationary pressure, not create it via cost-push dynamics.

Which of the following factors would be most likely to lead to cost-push inflation?

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