Answer to Question #134937 in Macroeconomics for Valerie

Question

Choose the correct answer
Demand-pull inflation may be caused by_________, while cost-push inflation may be caused by_________.
1. an increase in aggregate expenditure; an increase in prices of imported capital and intermediate goods.
2. an increase in aggregate production; a decrease in the prices of imported capital and intermediate goods.
3. an increase in total production; an increase in aggregate demand.
4. a decrease in consumption spending; a decrease in the production cost.

Answer 1

Demand-pull inflation may be caused by an increase in aggregate expenditure, while cost-push inflation may be caused by an increase in prices of imported capital and intermediate goods.

Therefore the answer is (1) in the choice given.

It is important to note that demand-pull inflation is mainly caused by increase in general demand of product caused by factors such as increase income, economic growth and declining unemployment rate among other factors which will make the prices go up as a result of the increase in aggregate demand.

On the other hand cost-push inflation is mainly caused by increase in production cost which may result from increase in wages, increase in price of raw materials or increase in prices of imported products.