ECONOMICS
INFLATION
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Increases value of debt
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Cost of borrowing decreases
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Decreasing labour costs
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Business uncertainty
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Detailed explanation-1: -Inflation uncertainty increases the firm’s business risk, which refers to the volatility of the firm’s earnings, caused by the volatility of the firm’s volume of sales as well as the volatility of the firm’s price and cost structures.
Detailed explanation-2: -The Friedman-Ball hypothesis states that an increase in inflation will lead to more uncertainty about inflation. The Cukierman and Meltzer hypothesis states that when uncertainty about inflation increases, it causes high rates of inflation.
Detailed explanation-3: -During inflation, overhead costs like raw materials, utilities, and wages tend to rise. Periods of rising costs can mean prioritizing higher-margin goods and reducing production of low-profit products to help hold the bottom line.
Detailed explanation-4: -By using two different methodologies the Granger causality test and GARCH model Nas and Perry (2000) examine the relation between inflation and inflation uncertainty, and their empirical findings support the evidence, that the increasing in inflation rates causes increases inflation uncertainty.