Question

You’ve been invited to help a foreign affiliate of your company set next year’s prices. Inflation last year was 5%, the unemployment rate dropped to record lows, and GDP sky-rocketed. In addition, geopolitical tensions led the price of crude oil to rise by 50%. Given these circumstances, what do you think annual inflation will be next year? The most likely rate is below 5%. 0%. above 5%. 5%.

Answer 1

Answer: Above 5%

Explanation:

Unemployment has dropped to record lows which means that more people are able to afford goods and services. This increase in demand will shift the demand curve to the right thereby increasing prices.

Crude oil also rose in price which means that the price of gasoline has risen as well as the price of transport which is a major component of inflation.

Given these factors, inflation is sure to rise above the 5% level of the previous year.