Which of the following combinations of two factors is most likely to result in higher inflation, ceteris paribus?

Question

BlackTom AI · Accepted Answer

A rise in the general price level occurs when aggregate demand (AD) increases relative to aggregate supply (AS) or when a negative supply shock raises firms’ costs (short‑run AS shifts left). These are the central knowledge points: demand‑pull inflation (AD ↑ → price level ↑) and cost‑push inflation (SRAS ↓ → price level ↑).

Step‑by‑step reasoning:
1. Identify each factor’s effect on AD or AS.
   - Oil price increase: raises production and transport costs across many sectors → short‑run aggregate supply shifts left (SRAS ↓), reducing output and raising the price level (cost‑push inflation).
   - Increase in net exports: net exports are a component of AD (AD = C + I + G + NX). If net exports rise, AD shifts right (AD ↑), increasing output and the price level (demand‑pull inflation).
2. Combine effects: SRAS leftward shift (higher costs) and AD rightward shift (stronger demand) both push the price level upward. The combined effect is larger inflation than either factor alone because one squeezes supply while the other expands demand.
3. No numeric calculation is required, but conceptually the price level change is larger when AD increases and SRAS decreases simultaneously.

Why d is correct:
- It pairs a cost‑push shock (higher oil prices) with a demand‑pull shock (higher net exports); both raise inflation ceteris paribus, so together they are most likely to produce higher inflation.

Why the other options are incorrect:
- a: Global recession and higher unemployment lower AD and reduce wage/price pressure → lower inflation or deflation.
- b: Higher productivity lowers unit costs (SRAS shifts right) reducing inflation; decreased net exports reduce AD → both lower inflation.
- c: Decreases in government spending and household disposable income reduce AD → lower inflation.

Conclusion: The correct answer is d. An increase in oil prices and an increase in net exports most likely result in higher inflation, ceteris paribus.

Which of the following combinations of two factors is most likely to result in higher inflation, ceteris paribus?Single choice

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