Graphically, cost-push inflation is shown as a
leftward shift of the AS curve.
rightward shift of the AS curve.
rightward shift of the AD curve.
leftward shift of the AD curve.
The correct answer and explanation is :
Correct Answer:
Leftward shift of the AS curve.
Explanation:
Cost-push inflation occurs when the overall price level rises due to an increase in the costs of production, such as wages, raw materials, or energy prices. This type of inflation is caused by factors that negatively impact the aggregate supply (AS) of goods and services in an economy.
Graphically, cost-push inflation is represented by a leftward shift of the Aggregate Supply (AS) curve. The AS curve shows the total output of goods and services that firms are willing and able to produce at different price levels. When production costs rise, firms reduce their supply, causing the AS curve to shift leftward.
Why the AS Curve Shifts Leftward
- Increase in Production Costs – If the cost of inputs like oil, labor, or raw materials rises, firms face higher expenses. To maintain profit margins, firms produce less at the same price level, shifting AS leftward.
- Supply Shocks – Natural disasters, wars, or geopolitical issues can disrupt the supply chain, making production more expensive and reducing overall output.
- Higher Wages – If workers demand and receive higher wages, businesses may raise prices to cover these costs, leading to inflation.
- Government Regulations and Taxes – Stricter regulations, higher corporate taxes, or tariffs can increase costs for firms, reducing aggregate supply.
Impact on the Economy
- Higher Prices (Inflation) – Since supply decreases, scarcity leads to higher prices.
- Lower Output (GDP Decline) – Businesses cut production, slowing economic growth.
- Stagflation Risk – Cost-push inflation can lead to stagflation, a situation where inflation occurs alongside stagnant economic growth and high unemployment.
In contrast, demand-pull inflation results from an increase in aggregate demand (AD), shifting the AD curve rightward. However, cost-push inflation is solely due to supply-side constraints, making the leftward shift of the AS curve the correct graphical representation.