Final answer:
An increase in input costs such as wages typically leads to cost-push inflation, where companies pass on increased production costs to consumers in the form of higher prices, not increasing real output or demand-pull inflation.
Step-by-step explanation:
The correct option : b
An increase in the costs of inputs, such as wages, leads to cost-push inflation. This occurs when the rise in the cost of production inputs causes producers to raise prices to maintain profit margins. A common example is when the cost of labor or materials such as oil increases, companies will typically pass these costs on to consumers in the form of higher prices for the final goods and services. From an economic perspective, when input costs rise, some firms may incur economic losses and potentially exit the market. This leads to a leftward shift of the supply curve, resulting in an increase in the price level as the market adjusts to the new equilibrium, where the remaining firms earn zero economic profits.
This contraction in output reflects the direct impact of higher production costs and does not result in an increase in real output or demand-pull inflation, nor does it cause a decrease in equilibrium price level. This happens because higher input costs for firms lead to higher production costs, which are then passed on to consumers in the form of higher prices. As a result, the aggregate supply curve shifts to the left, causing an increase in the price level without a corresponding increase in real output.