Tariffs Raise Import Costs, Driving Inflation

Steps:

• Inflation occurs when prices rise due to increased costs or demand.
• Evaluate each option's impact on aggregate demand or supply.
• Options A, B, and C reduce demand or costs, lowering inflation pressure.
• Option D increases costs of goods, pushing prices up.

Why D is correct:

• Taxes on imports (tariffs) raise the price of imported goods, increasing overall cost-push inflation as defined by higher input costs in the economy.

Why the others are wrong:

• A: Higher saving reduces consumer spending, decreasing demand-pull inflation.
• B: Higher interest rates discourage borrowing and investment, slowing economic activity and inflation.
• C: Greater labor productivity lowers production costs per unit, reducing inflationary pressures.

Final answer: D