Q.
Explain the impact of the following due to the increase in rate of inflation:-
i) Price level of goods and services. (4 marks)
ii) Value of money. (4 marks)
iii) Profits of entrepreneur. (4 marks)
iv) Dividend and bonus to shareholders. (4 marks)
v) Income of government officers. (4 marks)
(20 marks, 2013 Q8)
A.
i) Price level of goods and services would increase as more money is after the same quantity of goods and services. In reaction to more available money in the system, producers would sell goods and services at a higher price as the value of money has shrink.
ii) Value of money has reduced. More availability of cash in the system increases the prices of goods and services, and thus, the value of money to purchase a unit of goods and service has lost its value as now producers demands more money.
iii) Profits of entrepreneur may increase in a short run as higher price of goods and services sold would increase profitability with the same wages and cost to produce the goods and services. However, in the long-run the raw material cost and wages increase due to lost of value of money and the cost of production hence increases over time. Then, profits drop and entrepreneur may eventually suffer.
iv) Dividend and bonus to shareholders would increase as profit increases in the short term. However, as cost increases over time, the pressure of higher cost on the business reduces profit eventually. Thus, total return of profit to the company decreases and therefore, the dividend and bonus would also disappear.
v) Income of government officers is determined by the federal or the state government under their respective schemes. If there is no change of salary scheme, the income of government officers would shrink in the effect of inflation as prices of goods and services rise. The same salary of a government officer would not purchase the similar amount of goods and services compared to period before inflation. Government officers would have less value in their salaries.
Ref:
Own account.