IAI Actuarial Core Principles · Business Economics · Business activity, unemployment and inflation
Which of the following best describes cost-push inflation?
Cost-push inflation is a rise in the general price level caused by higher production costs, such as wages or imported inputs, which shift aggregate supply inwards. It differs from demand-pull inflation, which stems from excess aggregate demand.
- AA rise in the general price level caused by higher production costs, such as wages or imported raw materials, shifting aggregate supply inwardsCorrect
- BA rise in the general price level caused by excess growth in aggregate demand when the economy is at full employment
- CA fall in the general price level caused by improved productivity
- DA one-off rise in the price of a single product relative to others, with no change in the general price level
- A rise in prices caused solely by an appreciation of the domestic currency
Explanation
Cost-push inflation arises when firms' costs rise (wages, energy, imported inputs) and the aggregate supply curve shifts inwards, raising the price level. Option 1 describes demand-pull inflation. A currency appreciation would normally lower import costs and so reduce, not cause, inflation.
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