Tariffs Raise Import Costs, Boosting Inflation

Steps:

• Identify inflation as a sustained rise in the general price level, often from demand-pull or cost-push factors.
• Evaluate each policy's impact on aggregate demand (AD) or supply (AS).
• Determine which shifts AD rightward or AS leftward to increase prices.
• Select the option causing higher production costs or prices.

Why D is correct:

• Raising import tariffs increases costs of imported goods and inputs, shifting AS leftward and causing cost-push inflation per the aggregate supply model.

Why the others are wrong:

• A: Higher income tax reduces disposable income, shifting AD leftward and decreasing inflation.
• B: Higher interest rates raise borrowing costs, reducing investment and consumption to shift AD leftward, curbing inflation.
• C: Limiting bank lending contracts credit availability, reducing money supply and AD, which lowers inflationary pressure.

Final answer: D