Describe Cost-Push Inflation in the Long-Run Aggregate Demand-Aggregate Supply Model

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The Answer is Cost-push inflation is caused by an increase in the price of a major resource such as oil.In the short run, an increase in the price of a resource will shift the short-run aggregate supply curve to the left.This in turn will lead to a new short run equilibrium at a higher price level and a lower level of real output.
If the government takes no action to counter the inflation, then a recession will occur that will lead to higher levels of unemployment.At some point, the price of the major resource that caused the inflation will decline along with nominal wages (because of the recession), so that the short-run aggregate supply curve shifts back to its original position.
If the government tries to counter the cost-push inflation and recession by using stimulative monetary and fiscal policies, the aggregate demand curve will shift to the right.Employment and real output will return to their full-employment levels, but the price level will now be even higher.The higher price level is likely to kick off another round of demands to increase nominal wages that will cause another leftward shift in the short-run aggregate supply curve.Thus, an inflationary spiral can result from government actions to increase aggregate demand to counter cost-push inflation.

Describe Cost-Push Inflation in the Long-Run Aggregate Demand-Aggregate Supply Model

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Describe Cost-Push Inflation in the Long-Run Aggregate Demand-Aggregate Supply Model

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Correct Answer:VerifiedShow Answer

Correct Answer:
Verified