Indirect taxes raise costs but curb demand

Steps:

• Indirect taxes (e.g., sales tax) increase production costs for firms by raising input prices.
• This shifts the aggregate supply curve leftward, boosting cost-push inflation.
• Higher taxes reduce consumers' disposable income and purchasing power.
• This decreases aggregate demand, lowering demand-pull inflation pressure.

Why B is correct:

• Cost-push inflation rises due to higher production costs (definition: inflation from supply-side cost increases); demand-pull falls as reduced spending curbs excess demand (definition: inflation from aggregate demand exceeding supply).

Why the others are wrong:

• A: Cost-push rises, not falls, from elevated production costs.
• C: Demand-pull falls, not rises, due to lower consumer spending.
• D: Demand-pull falls, not rises, despite cost-push increase.

Final answer: B