The statement that in periods of rapid inflation the true cost of using up capital equipment is understated, thus inflating business income is known as the:
A) Inflation effect
B) Fisher effect
C) Liquidity effect
D) Depreciation effect
E) Risk effect
F) Segmented markets effect

Question

Quizplus · Accepted Answer

During periods of rapid inflation, the historical cost basis used for calculating depreciation does not reflect the current higher replacement cost of capital equipment. This results in an understatement of the true cost of using up capital equipment, leading to an overstatement of business income. This concept is referred to as the Depreciation effect.

The Statement That in Periods of Rapid Inflation the True