Cost Push Inflation Flashcards, test questions and answers

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What is Cost Push Inflation?

Cost Push Inflation is an economic phenomenon in which prices rise due to a combination of rising costs of production and reduced competition. It occurs when the cost of production rises faster than demand for products, resulting in higher prices being passed on by producers to consumers. This type of inflation is often seen during periods of rapid economic growth as companies increase their output to meet increased demand from customers, leading to increases in wages, materials and other costs associated with producing goods and services. The primary cause of Cost Push Inflation is a decrease in aggregate supply coupled with an increase in aggregate demand. A decrease in aggregate supply could occur due to rising wages or higher raw material costs that are not matched by productivity gains, while an increase in aggregate demand can be caused by government spending or consumer borrowing. As suppliers attempt to keep up with increasing demands they may raise prices so they can remain profitable; this leads consumers facing higher prices even though the amount they receive for their money has decreased (this is known as inflation ). Government intervention (monetary policy) can help reduce cost push inflation if it restricts credit availability or raises taxes on luxury goods, forcing people who have greater disposable income into other types of spending such as investments instead. Governments may also intervene by attempting to maintain price stability through various policies such as tariffs or subsidies on imported goods; however these measures can lead to distortions within the market and are not always successful at controlling cost push inflation over time.Ultimately, it is important for businesses and governments alike to work together towards achieving price stability through sound fiscal policy. When all stakeholders cooperate with each other then there will be balance between the forces driving both sides supply and demand resulting in lower levels of inflation overall economy-wide.