ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
Which of the following is a typical cost to businesses of high and volatile inflation?
A typical cost is menu costs and greater uncertainty. Frequent price changes are needed, and volatile inflation makes planning, budgeting and investment decisions harder. Real profits are not guaranteed to rise, and the need to revise price lists and contracts increases rather than decreases.
- AMenu costs and greater uncertainty, which make planning and investment decisions harderCorrect
- BA guaranteed increase in real profits because selling prices always rise faster than costs
- CA reduction in the need to revise price lists and contracts
Explanation
High and volatile inflation forces firms to change prices often (menu costs) and makes forecasting and investment appraisal less reliable. Profits are not guaranteed to rise, and the need to revise prices and contracts increases rather than falls.
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