At the start of a cost-push inflation,
A)the price level remains constant and real GDP decreases.
B)the price level and real GDP both increase.
C)the price level remains constant and real GDP increases.
D)the price level rises and real GDP decreases.
E)the price level rises and real GDP does not change.

Question

Quizplus · Accepted Answer

In a cost-push inflation, the increase in production costs (e.g. wages, raw materials) causes a decrease in the quantity of goods and services supplied. This leads to a decrease in real GDP. However, at the same time, firms pass on these higher costs to consumers by raising prices, causing the price level to rise. Therefore, the price level rises and real GDP decreases at the start of a cost-push inflation.

At the Start of a Cost-Push Inflation