The economy starts out at a full-employment equilibrium. Some events then occur that generate a cost-push inflation. Which of the following events might start a cost-push inflation?

Question

Quizplus · Accepted Answer

An increase in the money wage rate or an increase in the money prices of raw materials can lead to cost-push inflation because producers face increased production costs, which they pass on to consumers in the form of higher prices. This can trigger a cycle of wage-price increases as workers demand higher wages to keep up with the rising cost of living, which in turn prompts further price increases. The other events listed are not likely to initiate cost-push inflation.

The Economy Starts Out at a Full-Employment Equilibrium