Causes Of Inflation AS/AD Model (by Decreases In AS (AS Shifts Left)) Cost-Push Inflation

Question 1

Exchange rate falls

Answer 1

Cost of imported raw materials rise because imports are relatively more expensive because it takes more NZD to pay for the imports. This causes a rise in costs of production for firms and will reduce profit margins

Question 2

Price of oil (an important import)

Answer 2

Cost of imported raw materials rise because oil is used to make petrol and diesel so a rise in the price of oil causes a rise in the price of petrol and diesel which will cause the cost of transportation to rise for all firms and so will reduce profit margins

Question 3

Increases in GST

Answer 3

A tax on production and increases the cost of production for firms and reduces profit margins

Question 4

Subsidies (Including wage subsidies which was a feature of the covid response in 2020)

Answer 4

A transfer payment to firms - decreases the cost of production for firms

Question 5

Productivity falls

Answer 5

Because more resources are required to make the same amount of output which means costs of production are higher for firms and this will reduce profit margins