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Demand-Pull and Cost-Push Inflation quiz

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  • What is demand-pull inflation?
    Demand-pull inflation occurs when increased demand outpaces supply, causing prices to rise even though the quantity supplied remains constant.
  • What happens to equilibrium price during demand-pull inflation?
    The equilibrium price increases because demand rises but supply cannot match it, leading to higher prices.
  • Why does quantity supplied not increase during demand-pull inflation?
    Quantity supplied remains constant because production cannot be increased to meet the higher demand.
  • What is the main cause of cost-push inflation?
    Cost-push inflation is caused by rising production costs, which reduce supply and push prices upward.
  • How does a supply shock relate to cost-push inflation?
    A supply shock occurs when unexpected increases in production costs reduce supply, leading to cost-push inflation.
  • What happens to equilibrium quantity during cost-push inflation?
    Equilibrium quantity decreases because higher production costs cause firms to reduce output.
  • How do profits change for firms during cost-push inflation?
    Profits fall as per unit production costs rise, leading some firms to leave the industry and reduce supply.
  • What is the effect of demand-pull inflation on price and quantity if supply is constant?
    Prices rise while the quantity supplied remains unchanged, as demand increases but supply cannot respond.
  • How does the supply curve shift during cost-push inflation?
    The supply curve shifts to the left, indicating a decrease in supply due to higher production costs.
  • What is meant by 'too much spending chasing too few goods'?
    It describes demand-pull inflation, where excessive demand cannot be met by available supply, causing prices to rise.
  • What is the difference between demand-pull and cost-push inflation?
    Demand-pull inflation is caused by increased demand, while cost-push inflation is caused by increased production costs reducing supply.
  • What happens to the market equilibrium during demand-pull inflation?
    The equilibrium price rises, but the equilibrium quantity does not increase because supply is fixed.
  • What is the role of scarcity in demand-pull inflation?
    Scarcity means supply cannot meet increased demand, resulting in higher prices without increased output.
  • How does cost-push inflation affect the number of producers in the market?
    Higher costs and lower profits cause some producers to exit the market, reducing overall supply.
  • Why do prices rise in both demand-pull and cost-push inflation?
    In both cases, prices rise because either demand increases or supply decreases, shifting the market equilibrium upward.