According to the inflation-caused depreciation effect:
A) The true cost of using up existing capital equipment is understated when there is deflation
B) The true cost of using up existing capital equipment is overstated when there is deflation
C) After-tax profits are higher with inflation
D) Depreciation methods understate the true replacement cost of capital goods
E) None of the above

Question

Quizplus · Accepted Answer

Inflation causes the historical cost basis used in depreciation methods to understate the true replacement cost of capital goods, as the actual cost to replace the equipment at current prices is higher than the historical cost.

According to the Inflation-Caused Depreciation Effect