Cost-Push Inflation from Higher Import Costs

Steps:

• Rising prices of imported raw materials increase production costs for firms.
• Higher costs shift the aggregate supply (AS) curve leftward, decreasing AS.
• With AD unchanged, the new equilibrium has higher price level and lower output.
• This results in stagflation: rising prices and economic slowdown.

Why B is correct:

• A leftward AS shift raises the price level due to the inverse relationship between AS and prices in the AD-AS model.

Why the others are wrong:

• A: AS decrease raises prices, not lowers them.
• C: AS does not increase; costs rise, reducing supply.
• D: AS does not increase; higher costs constrain production.

Final answer: B