Assuming that GDP currently equals potential GDP, a cost-push inflation could result from which of the following?
A) an increase in the nationʹs capital stock
B) a large crop failure that boosts the prices of raw food materials
C) an increase in the labor force
D) a decrease in tax rates

Question

Quizplus · Accepted Answer

A large crop failure that boosts the prices of raw food materials would increase production costs for businesses. As a result, firms would be forced to raise prices, leading to cost-push inflation. None of the other choices would lead to cost-push inflation in the short run assuming GDP equals potential GDP.

Assuming That GDP Currently Equals Potential GDP, a Cost-Push Inflation