Answer to Question #300005 in Macroeconomics for Fanatic

Question

According to the case study, the fuel price increase is one of the main factors resulting in an increase in inflation. Use an AD-AS diagram to illustrate and explain the type of inflation implied by the fuel price increase. (

Answer 1

The type of inflation caused by the rise in the cost of fuel is the cost-push. In this case, the rise in fuel prices causes a reduction in the supply of goods and services because of the increase in the production cost. The increase in the production cost will make the cost of goods and services to be high thereby reducing demand.