Describe the effects of the price rise on capital investment.

1.	Describe the effects of the price rise on capital investment.
Answer» The uncontrolled price rise, described as hyperinflation, has the following effects on capital investment: It leads to fall in value of money and decline in purchasing power leading to reduced savings and capital investment. The shortage of capital discourages the entrepreneurs from taking risks in production activities. As the value of money declines progressively, the moneyed people change their option of investment. They invest in precious metals like gold and real state and thereby funds are not available for the productive activities. For want of capital, new industries are not started which halts generations of employment. The entrepreneurs divert available capital to the production of more profitable luxury goods. This results in the shortage of consumer goods. It discourages the flow of foreign funds in production activities as investments become less profitable.

Answer»

The uncontrolled price rise, described as hyperinflation, has the following effects on capital investment:

It leads to fall in value of money and decline in purchasing power leading to reduced savings and capital investment.
The shortage of capital discourages the entrepreneurs from taking risks in production activities.
As the value of money declines progressively, the moneyed people change their option of investment. They invest in precious metals like gold and real state and thereby funds are not available for the productive activities.
For want of capital, new industries are not started which halts generations of employment.
The entrepreneurs divert available capital to the production of more profitable luxury goods. This results in the shortage of consumer goods.
It discourages the flow of foreign funds in production activities as investments become less profitable.

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