When inflation is low and stable, firms:
A) can easily make judgments about relative real rates of return on alternative investments.
B) can easily make judgments about relative nominal rates of return on alternative
Investments.
C) tend to invest more in real estate.
D) tend to invest more in tax effective investments

Question

Quizplus · Accepted Answer

When inflation is low and stable, firms can easily make judgments about relative real rates of return on alternative investments because they can anticipate the purchasing power of money over time. Thus, they are more likely to make wise investment decisions. Choice B is incorrect because nominal rates of return do not consider changes in inflation, which can affect the real value of the investment. Choices C and D are irrelevant and not necessarily true in the context of low and stable inflation.

When Inflation Is Low and Stable, Firms