If the price of imported inputs suddenly rises,
A) we buy less, so aggregate demand falls
B) we pay more for the same quantity, so aggregate demand rises
C) we substitute domestic sources of inputs, so aggregate demand rises
D) our ability to produce is reduced, so aggregate supply shifts inward
E) GDP in unaffected because imports are netted out of gross domestic product

Question

Quizplus · Accepted Answer

If the price of imported inputs suddenly rises, our ability to produce goods and services is reduced because we become less efficient due to higher production costs. As a result, the aggregate supply curve shifts inward, causing a contraction in output and higher prices. This situation is known as cost-push inflation.

If the Price of Imported Inputs Suddenly Rises