Which of the following is a major challenge when governments try to fight cost-push inflation?
A. It usually causes unemployment to go down
B. Raising interest rates directly solves the issue
C. It often causes GDP to increase quickly
D. Fighting it can worsen unemployment and reduce output
Answer (2)
The correct answer is letter D. Fighting it can worsen unemployment and reduce outputCost-push inflation is tough to deal with because it happens when the cost of raw materials or wages increases, forcing businesses to raise prices. If the government responds by increasing interest rates (a common tool to fight demand-pull inflation), it may slow down the economy even more.This leads to a dangerous mix: high prices, high unemployment, and low production. That’s what we call stagflation—an economic situation like what happened globally in the 1970s and more recently during fuel price hikes in 2022 in the Philippines.For example, if oil prices go up and fuel becomes more expensive, transport costs rise. If the government tries to fix inflation by raising interest rates, businesses might cut jobs due to reduced demand and high borrowing costs. Now you have fewer jobs and still-expensive goods—a lose-lose situation.This is why cost-push inflation is tricky. The tools that work for demand-based inflation don't always help here, and may even make things worse.
The correct answer is D. Fighting it can worsen unemployment and reduce output.Cost-push inflation happens when production costs (like wages or raw materials) rise, pushing prices up. When governments or central banks try to fight this inflation—often by tightening monetary policy (like raising interest rates)—it can reduce demand in the economy. This may lead to higher unemployment and lower overall output (GDP) because businesses face higher costs and consumers spend less. So, the major challenge is that efforts to reduce cost-push inflation can worsen economic conditions by increasing unemployment and slowing growth.
