CFA Practice Question
In a cost-push inflation spiral, a cost-push increase in the price level leads to a situation in which real GDP is ______
B. below potential GDP and unemployment is below its natural rate.
C. below potential GDP and unemployment is above its natural rate.
A. above potential GDP and unemployment is above its natural rate.
B. below potential GDP and unemployment is below its natural rate.
C. below potential GDP and unemployment is above its natural rate.
Correct Answer: C
This is the start of cost-push inflation.
User Contributed Comments 11
| User | Comment |
|---|---|
| neenalisa | shudn't the answer be B??? |
| neenalisa | ok..C is correct |
| anneki | keyword: unemployment... made that mistake too |
| johntan1979 | Doesn't this question's answer contradict the answer for question #14? Question #14's answer is "if actual unemployment falls below NAIRU, theory suggests that cost-push inflation may occur." |
| johntan1979 | And from reading multiple sources on the net, all states the same: actual unemployment below natural or NAIRU, inflation rate increase. Answer should be B. |
| gill15 | You are correct in the past tense. If actual employement falls below NARU THEN cost push inflation occurs. Now take it a step further....now that cost push has occurred what happens to the situation? and there's the answer. |
| Shaan23 | I had B too. |
| Shaan23 | Oh..understand what Gill is saying. Key in the question is it LEADS to. |
| robbiecow | You start at equilibrium and price pressure shifts the SRAS left along the AD curve away from the intersection with the LRAS. Once SRAS moves to the left the higher price level and lower quantity will put pressure to stimulate AD. Any change meant to increase AD will shift AD rightwards along the new SRAS curve until it meets potential GDP, or LRAS. All the meanwhile the price is increasing. Note that once you shift SRAS leftwards and increase the price level you will be below LRAS, which causes higher unemployment. |
| dbedford | As wages go up discouraged workers will re-enter the laborforce thus increasing the unemployment rate |
| sshetty2 | Omg hope this is not on exam lol |