Macroeconomics
persist or become substantial, businesses may decide to pass the cost increases onto consumers in the form of higher prices for goods and services . 4. Consumer Impact: Cost-push inflation directly affects consumers by causing the prices of everyday goods and services to rise. This can lead to a decrease in consumers' purchasing power, as their income may not keep pace with the rising cost of living. 5. Wage-Price Spiral: Onenotablefeatureofcost-pushinflationisthepotentialforawage-price spiral. When prices rise due tohigherproductioncosts,workersmaydemandhigherwagesto maintaintheirstandardofliving. Ifbusinessesagreetowageincreases,thiscanfurtherdrive up production costs , leading to a cycle of risingwages and prices. Graphically, cost-push inflation is illustrated by a decrease in short-run aggregate supply , and therefore, ashiftoftheshort-runaggregatesupply(SRAS)curvetotheleft .Thiscausesthegeneral price level to rise.
Study Tip
Cost-push inflation is typically seen as lessdesirablethandemand-pullinflation,whichisdrivenby increasedconsumerdemandandisoftenassociatedwithagrowingandhealthyeconomy.Cost-push inflationcancreateuncertaintyandvolatilityinfnancialmarketsandcanbemorediffculttomanage because it may require addressing the root causes, such as supply disruptions or energy price shocks.
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