Inflation which is driven by higher minimum wage is known as

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BlackTom AI · Accepted Answer

The question asks about inflation driven by higher minimum wage. This is commonly categorized as cost-push inflation because it arises from an increase in production costs that firms face.

Explanation of the concept: when the minimum wage rises, firms may incur higher labor costs. To maintain profit margins, many firms pass these higher costs onto prices, shifting the short-run aggregate supply (SRAS) curve to the left. This leads to a higher overall price level (inflation) while potentially reducing output in the short run.

Why this is not typically demand-pull inflation: demand-pull inflation results from aggregate demand increasing faster than an economy’s capacity to produce, not primarily from rising input costs. A higher minimum wage doesn’t directly increase overall demand in a way that would consistently cause price level increases through demand pressures; its primary effect is through costs.

Why some might question the classification: in some scenarios, higher wages could boost consumer purchasing power and demand, exerting upward pressure on prices from the demand side. However, the classic and most direct link of a wage hike to higher inflation is via increased costs for businesses, hence cost-push inflation.

Note about the provided data: the answer options were not listed in the input, but the given correct answer identifies cost push inflation as the label. If you compare choices, you would look for the option that attributes inflation to rising production costs from higher wages rather than to excess aggregate demand.

BECO011 2025 Sample Final Exam for Practice

Inflation which is driven by higher minimum wage is known as

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