Which of the following best describes the primary effects of cost-push inflation?

• A. An increase in the general price level due to rising production costs, leading to reduced aggregate supply and potential unemployment.
• B. A decrease in the general price level caused by a fall in consumer demand.
• C. An increase in the general price level resulting from higher consumer demand and increased aggregate demand.
• D. A reduction in production costs that leads to lower prices and increased output.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of cost-push inflation. 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.
2. Step 2: Recognize that rising production costs cause firms to reduce the quantity of goods and services they supply at existing prices, which shifts the aggregate supply curve to the left (a decrease in aggregate supply).
3. Step 3: Analyze the effects of a leftward shift in aggregate supply: with less supply available at each price level, the general price level increases, leading to inflation.
4. Step 4: Understand the secondary effects: reduced aggregate supply can lead to lower output and higher unemployment because firms produce less and may lay off workers.
5. Step 5: Compare this with other types of inflation, such as demand-pull inflation, which is caused by increased consumer demand and shifts aggregate demand to the right, leading to higher prices but not necessarily reduced output.