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

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BlackTom AI · Accepted Answer

When evaluating which factor would most likely lead to cost-push inflation, we need to focus on changes that raise production costs and shift the supply curve.
Option a: An increase in transfer payments to households. This is a fiscal policy change that primarily affects demand (consumers’ purchasing power) rather than the costs of producing goods. It tends to influence aggregate demand more than the cost structure of firms, so it is not a classic driver of cost-push inflation.
Option b: A decrease in the rates of business taxation. Lower taxes on business can reduce production costs and potentially encourage more investment or production, which would tend to ease cost pressures rather than push prices up due to higher costs. Therefore, this option does not describe a cost-push shock.
Option c: An increase in the global oil price. Oil is a key input for many industries; when its price rises, production costs across a wide range of sectors increase. Firms often pass these higher costs to consumers in the form of higher prices, producing cost-push (costs-push) inflation as the overall price level rises due to increased costs. This aligns well with the typical mechanism behind cost-push inflation.
Option d: An increase in aggregate demand (AD). An uptick in AD is associated with demand-pull inflation, where higher demand drives up prices because the economy is "pulling" prices up from higher spending, rather than costs rising.
Thus, the factor most closely linked to cost-push inflation is the rise in global oil prices, which elevates production costs across many sectors.

MUF0062 Economics Unit 2 - Semester 2, 2025 Revision Quiz - Inflation (10 - 15 minutes)

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

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