Low Inflation Despite Falling Unemployment: Suppressed Cost-Push Pressures

Steps:

• Recall the Phillips curve shows an inverse relationship between unemployment and inflation rates.
• Falling unemployment typically signals rising demand-pull or cost-push inflation, but here inflation stayed low.
• Identify factors that could prevent wage/cost increases from raising prices.
• Global competition fits as it curbs firms' ability to pass on costs, breaking the expected inflation rise.

Why A is correct:

• Global competition reduces firms' market power, preventing cost pass-through and thus suppressing cost-push inflation as per standard microeconomic pricing theory.

Why the others are wrong:

• B: Increased import spending might weaken the exchange rate, raising import costs and inflation, not keeping it low.
• C: Low spare capacity implies the economy is near full employment, which should accelerate inflation via demand-pull pressures.
• D: Wages exceeding productivity raises unit labor costs, directly fueling cost-push inflation.

Final answer: A