Cost push inflation occurs when:

Question

Accepted Answer

The correct option is 3:

Cost-push inflation is a type of inflation caused by an increase in the costs of production, which leads firms to raise their prices to maintain their profit margins. This phenomenon is typically triggered by a negative supply shock—that is, an event that raises the cost of inputs across the economy. When the cost of a major input, like raw materials, increases, the per-unit cost of producing goods and services rises. Since firms must pay more to produce the same quantity, they pass these higher costs on to consumers in the form of higher prices. This reduces the overall aggregate supply in the economy, graphically represented by the aggregate supply curve shifting to the left, resulting in higher prices and lower output. An increase in the cost of raw materials, such as oil, minerals, or agricultural inputs, is a classic cause of cost-push inflation.

The incorrect option is 1: Wages are decreased.
A decrease in wages represents a decrease in the cost of labor, which is a major factor of production. This decrease in costs would likely encourage firms to lower prices or increase production, leading to deflationary pressure, not inflation.

The incorrect option is 2: Productivity of labour increases.
An increase in labor productivity means that more output can be produced with the same amount of labor input. This reduces the per-unit cost of production, leading to deflationary or disinflationary pressure (lower prices), and is therefore the opposite of cost-push inflation.

The incorrect option is 4: Aggregate supply curve shifts to the right.
A shift of the aggregate supply curve to the right indicates an increase in aggregate supply, meaning the economy can produce more at the same price level. This shift is typically caused by positive factors like technological improvements or reduced input costs, which leads to lower prices, not cost-push inflation.