Question : Cost-push inflation occurs when:
Option 1: Aggregate demand exceeds aggregate supply
Option 2: Aggregate supply exceeds aggregate demand
Option 3: Wages and input costs increase
Option 4: The government increases taxes
Correct Answer: Wages and input costs increase
Solution : The correct answer is (c) Wages and input costs increase
Cost-push inflation is driven by an increase in the production costs faced by businesses, which can be caused by various factors. When wages rise or the costs of raw materials, energy, or other inputs used in production increase, businesses face higher costs of production. In order to maintain their profit margins, businesses may pass on these increased costs to consumers by raising prices, leading to inflation.
An increase in wages can result from factors such as labor market dynamics, changes in minimum wage laws, or bargaining power of labor unions. Similarly, increases in input costs can be influenced by factors like changes in commodity prices, taxes, regulations, or supply chain disruptions.
Question : Demand-pull inflation occurs when:
Option 3: There is a decrease in aggregate demand
Option 4: There is a decrease in the aggregate supply
Option 1: There is an increase in aggregate demand
Option 2: There is a decrease in aggregate demand
Option 3: There is an increase in aggregate supply
Question : The equilibrium in the aggregate market occurs when:
Option 1: Aggregate demand equals aggregate supply
Option 2: Consumption equals investment
Option 3: Government expenditure equals net exports
Option 4: Saving equals investment
Question : If aggregate supply exceeds aggregate demand, the economy is likely to experience:
Option 1: Inflationary pressure
Option 2: Deflationary pressure
Option 3: Recessionary pressure
Option 4: Stagflation
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