Countering Cost-Push Inflation with Cost-Reducing Policies

Steps:

• Identify cost-push inflation as rising production costs, such as higher wages or import prices, shifting supply curve leftward and increasing prices.
• To reduce it, policies must lower costs: appreciate currency to cheapen imports and cut minimum wage to lower labor expenses.
• Evaluate options: appreciation reduces imported input costs; depreciation raises them, worsening inflation.
• Wage changes: lowering minimum wage curbs labor cost pressures; raising it exacerbates them.

Why A is correct:

• Appreciating the exchange rate lowers import prices (per purchasing power parity), reducing cost-push from foreign inputs, while lowering minimum wage directly cuts domestic labor costs.

Why the others are wrong:

• B: Raising minimum wage increases labor costs, fueling inflation despite cheaper imports.
• C: Depreciating exchange rate raises import costs, intensifying cost-push, even with lower wages.
• D: Both depreciation (higher import costs) and wage increase amplify production expenses.

Final answer: A