ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
A government raises the minimum wage significantly. Manufacturers respond by raising selling prices to protect their profit margins. Which type of inflation does this most clearly illustrate?
This illustrates cost-push inflation. A higher minimum wage raises firms' production costs, and they pass the increase on to customers through higher prices. It is not driven by excess demand, and the scenario mentions no exchange rate change that would indicate imported inflation.
- ADemand-pull inflation
- BCost-push inflationCorrect
- CImported inflation due to a weaker exchange rate
Explanation
Higher labour costs increase production costs, and firms pass these on through higher prices. This is cost-push inflation. Nothing in the scenario suggests excess demand or a change in exchange rates.
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