Answer to Question #211133 in Macroeconomics for Nawaf

Question

Based on the material of the chapter “money growth and inflation” of your text book explain with the help of diagrams how inflation starts in an economy? Why multinational companies feel unsafe to invest in those countries that have high inflation rate? Write your answer the light of your text book materials

(Chapter 31: Money Growth and Inflation)

Answer 1

Inflation in an economy when the demand increases more than the supply where the economy is growing faster than the normal growth rate.

It is simple known as demand pull inflation.

Demand is greater than supply=inflation

The increase of cost of production on the other side results to inflation as aggregate supply shifts to left

Inflation rate interferes with the normal business environment by increasing the effects of bond debts resulting to negative effects to foreign investors.

Inflation is a concern to investors because it eats away at actual investment and returns on investments. The majority of investors want to boost their long-term buying power. This aim is jeopardized by inflation, because expected returns must keep pace with inflation in order to grow real buying power.