Answer:
Cost-push inflation occurs when short run aggregate supply decreases until equilibrium output falls below the employment level.
As a result, price level increases.
One possible cause of cost-push inflation is an increase in the cost of inputs.
To combat falling aggregate output, the government may introduce policies to increase in aggregate demand to the point where it and short-run aggregate supply intersect long run aggregate supply at the same point.
These policies cause equilibrium output to return to its full employment level, and the price level increases even further.
Explanation:
Cost‑push inflation is caused by a decrease in short‑run aggregate supply (SRAS) that results in an equilibrium below an economy's full employment level of aggregate output. This can be caused by a substantial increase in the cost of inputs, such as oil or wages, giving rise to an increase in the cost of production.
Initially, the economy will reach an equilibrium where the new SRAS curve intersects the aggregate demand curve. At this equilibrium, the aggregate output has decreased and the price level has increased.
Since the economy is now operating below full employment output, the government may get involved by creating policies to increase aggregate demand, so that the equilibrium returns to the full employment level of output. At this new equilibrium, aggregate output returns to the economy's full employment level, but the aggregate price level has increased further.
