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

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BlackTom AI · Accepted Answer

To determine which factor would most likely lead to cost-push inflation, let's evaluate each option in turn and connect them to the concept of cost-push inflation.
Option a: An increase in aggregate demand (AD). Cost-push inflation is driven by rising costs of production, not by higher demand. An increase in AD would more likely cause demand-pull inflation, where higher overall spending pushes up prices from the demand side. Therefore, this option is not the best fit for cost-push inflation.
Option b: An increase in transfer payments to households. Transfer payments (like subsidies or welfare) increase consumers' income, which can raise overall demand and aggregate spending. This tends to influence demand-pull inflation or fiscal stimulus effects, not primarily cost-push inflation caused by rising production costs. Hence, this is not the primary driver of cost-push inflation.
Option c: An increase in the global oil price. Oil is a key input in many production processes and transportation. When oil prices rise, firms face higher energy and input costs, which can be passed on to prices of goods and services. This directly creates higher production costs across the economy, a hallmark of cost-push inflation.
Option d: A decrease in the rates of business taxation. Lower business taxes reduce production costs for firms, which could lower or stabilize prices or at least not push prices up. This would counter inflationary pressures from costs, not encourage cost-push inflation. So this option does not align with cost-push dynamics.
In summary, the crucial mechanism behind cost-push inflation is rising production costs that push prices upward. Among the options, only a rise in global oil prices directly elevates input costs across many sectors, making it the most plausible driver of cost-push inflation among the choices.

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

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