Cost Push Inflation – Types of Inflation | Macroeconomics

Cost Push Inflation

Cost Push Inflation

Cost Push Inflation is a type of inflation that occurs when aggregate demand remains constant but there is a decline in aggregate supply due to external factors that cause rise in price levels. An increase in labor and materials costs throughout the supply chain causes cost-push inflation. When this happens, the price of goods and services will increase, resulting in a decrease in supply. In contrast, demand-pull inflation occurs when prices rise simply because of a rise in demand.

The supply-side inflation caused by higher goods prices is called cost-push inflation. This correlates to the concept of inelastic demand, which states that people will accept any price for a product. Cost-push inflation is characterized by how higher production costs increase prices.

Causes of Cost Push Inflation 

Cost Push Inflation is caused by the following Factors: 

  1. Increased Labor Costs
  2. Increased Taxes and Government Regulation
  3. Scarcity of Raw Materials 
  4. Monopolies in the market
  5. Natural Disasters
  6. High wages and Production costs
  7. Imported Inflation
  8. Disruption in the Product Supply
  9. Exchange Rates

 

Pros and Cons of Cost Push Inflation 

The Advanatges and Disadvantages of Cost Push Inflation are as follows:

Pros of Cost Push Inflation 

Cons of Cost Push Inflation

  • Reduced Unemployment
  • Higher Wages for Workers
  • Increased Consumer Spending Power
  • Increased Prices
  • Decreasing Demand
  • Creates Uncertainty

How does Demand Pull Inflation differ from Cost Push Inflation

Demand Pull Inflation

Cost Push Inflation

Demand Pull Inflation is a type of Inflation that occurs when aggregate demand exceeds the aggregate supply for the goods and services at existing prices.Cost Pull Inflation is a type of inflation when aggregate demand remains constant but there is a decline in aggregate supply due to external factors that cause rise in price levels.
In Demand Pull Inflation , Aggregate demand increases.In Cost Push Inflation , Aggregate demand remains constant.
Demand Pull Inflation is caused by Monetary and real factors.Cost Pull Inflation is caused by Monopolistic groups of the society.

Cost Push Inflation Quiz / MCQs / FAQs 

 

Which scenario is an example of cost push inflation  

A) Consumers have more money to buy cars, and the prices of cars and car parts rise as a result.
B) An increase in workers’ wages raises the production cost of cars, and car prices rise as a result.
C) The demand for cars falls as consumers have less disposable income, and car prices fall as a result.
D) A government bailout helps car manufacturers lower their costs, and car prices fall as a result.

B) An increase in workers’ wages raises the production cost of cars, and car prices rise as a result.

According to the cost-push theory, what is responsible for inflation?  

a) Too much money is in circulation.
b) Demand for goods and services exceeds existing supply.
c) The economy is operating as though there was a war.
d) Producers raise prices to meet increased costs.

d) Producers raise prices to meet increased costs.

Cost-push inflation tends to be characterized by all of the following, except

A) Falling real output
B) Falling unemployment
C) Being automatically self-limiting
D) Rising general price level

B) Falling unemployment

Graphically, cost-push inflation is shown as a

a) rightward shift of the AD curve.
b) rightward shift of the AS curve.
c) leftward shift of the AS curve.
d) leftward shift of the AD curve.

c) leftward shift of the AS curve.

With cost-push inflation in the short run, there will be:  

A) An increase in real GDP
B) A leftward shift in the aggregate demand curve
C) A decrease real GDP
D) A decrease in unemployment

C) A decrease real GDP.

If government uses fiscal policy to restrain cost-push inflation, we can expect:  

a) the aggregate demand curve to shift rightward.
b) the unemployment rate to Rise.
c) the inflation rate to rise.
d) tax-rate declines and increases in government spending

b) the unemployment rate to Rise.

 

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