In: Economics
Based on the material of the chapter “money growth and inflation” of your text book explain 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.
ANS
The inflation starts in an economy due to the increase in money supply in the economy. This increase in money supply can be due to several reasons, like decrease or cutting off of taxes, increase in wages, increase in autonomous investment or induced investment. The increase in money supply into an economy effects the people by increasing their demand for goods and services and as the demand of the people increases and the money supply within them increases too, the suppliers tends to increase the prices of goods and services as to gain maximum optimum profit and to attain the equilibrium in the economy and this increase in demand and price hike causes inflation.
The multinational companies feel unsafe to invest in those countries that have high inflation rate as the prices of raw material and labours in these countries are higher than normal and due to which the mulltinational companies may have to suffer the loss by payin high wagess to the labors.,it also effects on lowering the price of bonds and due to which the multinational companies are feared to invest in economy which pertains inflation. They also feel unsafe as government take several measures to recover inflation and which can cause severl harmful effects to these multinational companies.