Question

Please explain your understanding of concept of inflation, why it exists, and why it matters when it comes to financial decisions

Answer 1

Inflation is a rate at which the general prices of goods and services in an economy rises and at the same time purchasing power of currency falls.

For an example lets us assume that the inflation rate is 3%, The current price of a packet of a biscuit is $5. Now next year the price of that packet will be $5.15.

If we talk about why the inflation exist then the simple reason s that when the government prints more currency than currently to circulate into the market then people have more money with them. Hence their purchasing power is increased. But the supply of goods and services remains the same. So too much money chases less products and services. Hence the general prices of product and services get increased.

The inflation has huge impact on the financial decisions.

Higher inflation rate means there is plenty of cin the market hence the company can get funds at the cheaper interest rate. People has purchasing power it means the company can increase its production as per the requirement.

Due to the higher inflation the company can plan to collect t operating capital.

Due to increase in general prices the management faces pressure t increase the wages of the workers and employees in the organization.

The company increases the prices of the product and services and gets more revenue and currency.

The company can take financial decisions that where to invest. When the inflation rate is high then the companies can invest heavily and enjoy good rate of return.