Which of the following will likely lead to cost-push inflation? Select the two correct answers.
a
An ongoing war causes government spending to nearly double in quantity.
b
Consumers become more comfortable with debt, increasing their spending as they take on more loans.
c
Exports increase dramatically after a relative drop in price.
d
A tornado destroys factories and lowers supply levels throughout the economy.
e
An increase in the price of oil has reduced supply of all goods and services that use oil as an input.
d and e are the correct answers. A decrease in supply due to natural disasters or increased input costs such as oil prices can cause cost-push inflation, as producers will raise prices to maintain their profit margins. The other options do not necessarily directly affect supply or production costs.
The two correct answers that are likely to lead to cost-push inflation are:
d) A tornado destroys factories and lowers supply levels throughout the economy.
e) An increase in the price of oil has reduced supply of all goods and services that use oil as an input.