Which of the following can cause cost-push inflation if the economy is currently in equilibrium at full-employment GDP?
A)A flood which destroyed much of the country's crops.
B)An increase in the size of the labour force.
C)A decrease in personal income tax rates, which increases after-tax income.
D)An increase in the capital stock in the country.

Question

Quizplus · Accepted Answer

A flood which destroys crops can lead to a decrease in the supply of goods, causing prices to increase. This is an example of a cost-push inflation.

None of the other options listed would cause cost-push inflation if the economy is currently in equilibrium at full-employment GDP. Option B (an increase in the size of the labour force) might increase the supply of goods and services, but this would not necessarily cause inflation. Option C (a decrease in personal income tax rates) might increase consumer spending and aggregate demand, leading to demand-pull inflation, but it would not cause cost-push inflation. Option D (an increase in the capital stock) might lead to an increase in production and output, but this would not necessarily cause inflation.

Which of the Following Can Cause Cost-Push Inflation If the Economy