CFA Practice Question

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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 ______

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 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
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