IAI Actuarial Core Principles · Business Economics · Business activity, unemployment and inflation
A sharp rise in global energy prices raises production costs for Indian manufacturers, shifting short-run aggregate supply to the left, with aggregate demand unchanged. Which combination of outcomes describes this?
Output falls and prices rise, which is cost-push inflation with a risk of stagflation. Higher energy costs shift short-run aggregate supply left, and with aggregate demand unchanged the new equilibrium has a higher price level and lower real output.
- AHigher output and higher prices, demand-pull inflation
- BLower output and lower prices, a deflationary recession
- CLower output and higher prices, cost-push inflation with stagflation riskCorrect
- DHigher output and lower prices, a supply-led boom
- Unchanged output and higher prices only
Explanation
A leftward SRAS shift with fixed AD moves equilibrium to a higher price level and lower real output. This is cost-push inflation, and combined with rising unemployment it is stagflation. Demand-pull inflation needs an AD shift instead.
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