Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is one cause of inflation?

1. Fixed production levels

2. Cost push factors

3. Decreasing money supply

4. Stable consumer demand

The correct answer is: Cost push factors

Inflation is primarily driven by various economic factors, one of which is cost push factors. Cost push inflation occurs when the production costs for goods and services increase, leading producers to raise prices to maintain profit margins. This can happen due to several reasons, such as rising labor costs, increases in the prices of raw materials, or supply chain disruptions. As these costs escalate, businesses pass on the additional expenses to consumers in the form of higher prices, contributing to inflation. In contrast, fixed production levels can limit supply but do not inherently cause inflation if demand remains constant. A decreasing money supply typically helps to reduce inflationary pressures, as there is less currency available for consumer spending. Stable consumer demand may contribute to equilibrium in prices but does not cause inflation on its own; it can even mitigate inflationary effects. Thus, cost push factors are a significant cause of inflation as they directly impact production costs and, subsequently, market prices.