Explain how inflation hurts productivity when businesses decide to invest in less new projects because high and variable inflation makes it difficult to determine the profitability of projects.
The increase in the risk means that only projects with a higher than normal expected returns will be undertaken which will lead to less investment and distort the economy. It will also lead to investments that have higher real risks to get the high expected returns because the real risk will be small compared to the inflation risk for the investment.
Inflation hurts productivity because inflation is the direct cause of a recession. During a recession, people are afraid to spend money, thereby setting the course for and maintaining an inefficient economy. B
ecause the economy is inefficient, because people refuse and are reluctant to spend money, so too do people refuse to provide services. Such services include labor, thereby hurting productivity.
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The increase in the risk means that only projects with a higher than normal expected returns will be undertaken which will lead to less investment and distort the economy. It will also lead to investments that have higher real risks to get the high expected returns because the real risk will be small compared to the inflation risk for the investment.
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