With reference to the Indian economy, cost-push inflation can be caused/increased by which of the following?
1. Increase in wages and salaries
2. Rising crude oil prices
3. Expansionary fiscal policy
4. Shortage of raw materials
5. Decline in the value of the currency
Select the correct answer using the code given below.
(a) 1, 2, and 4 only
(b) 2, 4, and 5 only
(c) 1, 2, 3, and 4 only
(d) 1, 2, 4, and 5 only
Explanation 1 is correct : When wages and salaries increase, businesses have to pay workers more. To cover these higher labor costs, businesses often raise the prices of their products or services. This leads to cost-push inflation, where prices go up due to higher production costs.
Statement 2 is correct : When crude oil prices rise, the cost of transportation, manufacturing, and energy also increases. Since oil is used in many industries, higher oil prices lead to higher production costs, which causes businesses to raise their prices, contributing to inflation.
Statement 3 is not correct : Expansionary fiscal policy, like increased government spending or tax cuts, boosts overall demand in the economy. This higher demand for goods and services can push prices up, causing demand-pull inflation, not cost-push inflation, which is driven by rising production costs.
Statement 4 is correct : A shortage of raw materials means businesses have to pay more for the materials they need to produce goods. This increased cost of production is passed on to consumers in the form of higher prices, leading to cost-push inflation.
Statement 5 is correct : A weaker currency increases the cost of imports, including raw materials, contributing to cost-push inflation.
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