Answer to Question #300084 in Macroeconomics for Fanatic

Question

Mention and explain the type of policy that can be implemented to combat cost push inflation

Answer 1

Cost push inflation results where the cost of a product or service increases where the product do not have a substitute. The increase in price leads to a general increase in prices that are related to the product or services causing inflation. In this scenario, the aggregate demand is higher than the aggregate supply.

One of the major ways of combating cost push inflation is introducing a supply-side policy. However, it will take a long time before it takes effects. Therefore, reducing the production cost by the government providing subsidies is one of the solutions that can be implemented. The government can offer subsidies in terms of labor cost, which cuts the general price of the product or service. Subsidizing ensures that some of the production costs are transferred to the government, which makes the firms not to spend some portion of their capital. Therefore, it forces the firms to reduce their prices since they have been subsidized