Question

Given below are two statements, one is labelled as Assertion (A) and other one labelled as Reason (R).
Assertion (A): Wage-Push Inflation and Profit-Push Inflation are two factors responsible for the Cost-Push Inflation.
Reason (R): Wage-push inflation takes place when higher wages are secured without a corresponding increase in labour productivity.
In light of the above statements, choose the most appropriate answer from the options given below.

• A. Both (A) and (R) are correct and (R) is the correct explanation of (A).
• B. Both (A) and (R) are correct but (R) is NOT the correct explanation of (A).
• C. (A) is correct but (R) is not correct.
• D. (A) is not correct but (R) is correct.

Hint:

Cost-push inflation is caused by supply-side cost increases.
If wages rise faster than labor productivity, unit cost of production increases, driving wage-push inflation.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
Cost-push inflation occurs when the general price level rises due to increases in the cost of wages and raw materials.
This shifts the aggregate supply curve to the left, raising prices while potentially reducing output.

Step 2: Detailed Explanation:
Let us analyze both statements:
- Assertion (A):
Cost-push inflation is driven by rising production costs.
The main components of cost-push inflation include:
1. Wage-Push Inflation: Initiated by wage increases that raise unit labor costs.
2. Profit-Push Inflation (or Mark-up Inflation): Occurs when firms with monopoly power increase profit margins by raising prices.
Therefore, Assertion (A) is correct.
- Reason (R):
Wage-push inflation occurs when workers or trade unions demand and secure wage increases that are not matched by gains in labor productivity.
If wages rise without a corresponding increase in productivity, unit labor costs increase.
Firms then pass these higher costs on to consumers in the form of higher prices.
Therefore, Reason (R) is correct.
- Relationship between (A) and (R):
Since Reason (R) explains the underlying mechanism of wage-push inflation, which is one of the main components of cost-push inflation listed in Assertion (A), (R) is the correct explanation of (A).
Thus, both (A) and (R) are correct, and (R) is the correct explanation of (A).

Step 3: Final Answer:
The correct option is (A).