Question

There are many kinds of costs of inflation to a society. Explain THREE such costs of inflation which are relevant to business firms.

Answer 1

1) Uncertainty in the market

Inflation give birth to the uncertainty in the market about future prices, cost and returns on investment which lead to the less investment in the economy. Firms becomes reluctant to invest money in the business.

2) Menu Cost

Menu cost refere to the cost of changing the price list of goods and services produced by the business firm. Due to inflation forms has to revise the prices of their products frequently.

3) decrease in real value of assets

Inflation and value of money has the inverse relationship. Increase in inflation reduces the value of money. So that inflation leads to the reduction in the real value of assets and savings of the business firms.

4) Increase in cost of production

Increase in inflation reduces the real wages of the labours which creates pressure on the firms to increase the wages of labour which increases the cost of production.