Cost - push inflation occurs when_______

Step 1: Analyze the question The question asks when cost-push inflation occurs. The key words are "cost-push," which tells us the cause of the price rise comes from the supply side, specifically rising costs.

Step 2: Explain the concept Inflation is a persistent rise in the general price level. There are two main types:

• Demand-pull inflation: "Too much money chasing too few goods." Aggregate demand rises faster than supply. It is linked to excess money in circulation, government deficit financing, and high spending.
• Cost-push inflation: Producers face higher costs of production (wages, raw materials, fuel, electricity, imported inputs). To protect their profits, they raise the prices of goods and services, so the general price level rises.

In Nigeria, a good example is a rise in the price of diesel or petrol. Manufacturers pay more to run their generators and transport goods, so they increase the prices of their products.

Step 3: Go through the options

• A. Production cost is high: Correct. Rising production costs push prices up. This is the definition of cost-push inflation.
• B. Government embarks on deficit financing: This increases the money supply and spending, which causes demand-pull inflation.
• C. Factors decrease: This is vague. A fall in the supply of factors could raise costs indirectly, but it is not the standard definition. Option A is the direct and complete answer.
• D. There is too much in circulation: This means too much money in circulation, which is demand-pull (monetary) inflation.

Step 4: Answer The correct answer is A. production cost is high.

Tip: Match the name to the cause.

• Cost-push → cost of production rises → supply side.
• Demand-pull → too much money/demand → demand side.

If you see "cost" in the question, look for "production cost" in the options.