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Cost-Push Inflation – SRAS Leftward Shift

Macroeconomics

This diagram illustrates cost-push inflation caused by a leftward shift in the short-run aggregate supply (SRAS) curve.

Diagram
Cost-Push Inflation – SRAS Leftward Shift
Curves and Elements

ad

AD: Aggregate demand curve, assumed constant in this case.

sras2

SRAS2: Initial short-run aggregate supply before the cost increase.

sras1

SRAS1: New, lower short-run aggregate supply after the cost increase.

lras

LRAS: Long-run aggregate supply, assumed fixed at full employment output Y1.

y1

Y1: Full employment level of output before the SRAS shift.

y2

Y2: New, lower level of output after the SRAS shift.

pl1

PL1: Original price level before the SRAS shift.

pl2

PL2: New, higher price level after the SRAS shift.

Key Explanations
1

Cost-push inflation occurs when the costs of production increase, causing firms to reduce supply at each price level.

2

This is shown in the diagram by a shift from SRAS2 to SRAS1.

3

The initial equilibrium is at PL1 and Y1, where AD intersects SRAS2.

4

After the shift to SRAS1, the new equilibrium is at a higher price level PL2 and lower output Y2.

5

This scenario leads to stagflation—higher inflation and lower real GDP.

Example Exam Question

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