FIGURE 11 COST-PUSH INFLATION
Cost-push inflation is represented by an initial decline in short-run aggregate supply from SRAS0 to SRAS2. Rising resource costs or inflationary expectations will reduce short-run aggregate supply, resulting in a short-run movement from point e to point b. If policymakers wish to return the economy to full employment, they can increase aggregate demand to AD1, but must accept higher prices as the economy moves to point c. Alternatively, they could reduce aggregate demand, but that would lead to lower output and higher unemployment.