Question

Cost-push inflation is a situation in which the:

Answer 1

Answer: b. short-run aggregate supply curve shifts leftward.

Explanation:

Cost Push Inflation occurs when the Aggregate Supply of Goods and Services DECREASES because of an increase in Production costs.

Companies can no longer keep producing at the previous levels they could have because the price of inputs have gone up and they are already at full capacity.

To maintain profit margins they will reduce production to cut costs.

This reduces the supply in the Market and forces the Supply curve left which leads to a higher equilibrium price all else being equal.

In the graph I attached below, you can see how the Short Run aggregate supply curve shifted to the left and took prices up as Demand remained constant.

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