A leftward shift in the aggregate supply (AS) curve typically leads to cost-push inflation. This phenomenon occurs when the overall supply of goods and services in an economy decreases, often due to increased production costs.
Here's how it works:
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Increased Production Costs: Factors such as rising wages, increased prices for raw materials, or supply chain disruptions can lead to higher production costs for businesses.
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Decrease in Aggregate Supply: When production costs increase, businesses may reduce the quantity of goods they are willing and able to produce at a given price level. This results in a leftward shift of the aggregate supply curve.
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Higher Price Levels: With lower aggregate supply, and assuming aggregate demand remains constant, the overall price level in the economy increases, leading to inflation. This is referred to as cost-push inflation because the rising costs of inputs push overall prices higher.
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Impact on Output: A decrease in aggregate supply can also lead to a reduction in real GDP, as fewer goods and services are produced. This can create a situation where the economy experiences stagnation (a slow growth rate or decline in output) alongside inflation, often termed "stagflation."
Thus, a leftward shift in the aggregate supply curve is indeed associated with cost-push inflation, as it highlights the relationship between rising costs and the overall price levels in an economy.