1.

Assertion (A): Cost inflation is caused by the shift in the aggregate supply curve.Reason (R): Shift in aggregate supply curve takes place because of the increase in wages.1. Both (A) and (R) are true and (R) is the correct explanation of (A).2. Both (A) and (R) are true and (R) is not the correct explanation of (A).3. (A) is true, but (R) is false.4. (A) is false, but (R) is true.

Answer» Correct Answer - Option 1 : Both (A) and (R) are true and (R) is the correct explanation of (A).

The correct answer is Both (A) and (R) are true and (R) is the correct explanation of (A).

  • Cost inflation occurs when overall prices increase (inflation) due to increases in the cost of wages and raw materials or shift in the supply curve.
  • A shift in aggregate supply can be attributed to many variables, including changes in the size and quality of labour, technological innovations, an increase in wages, an increase in production costs, changes in producer taxes, and subsidies and changes in inflation.

 

  • Cost-push inflation or Cost inflation
    • Cost-push inflation occurs when overall prices increase (inflation) due to increases in the cost of wages and raw materials.
    • Cost-push inflation can occur when higher costs of production decrease the aggregate supply (the amount of total production) in the economy.
    • Since the demand for goods hasn't changed, the price increases from production are passed onto consumers creating cost-push inflation.


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