Effects on Production: When the inflation is very moderate, it acts as an incentive to traders and producers. This is particularly prior to full employment when resources are not fully utilized. The profit due to rising prices encourages and induces business class to increase their investments in production, leading to generation of employment and income.
1. However, hyper – inflation results in a serious depreciation of the value of money and it discourages savings on the part of the public.
2. When the value of money undergoes considerable depreciation, this may even drain out the foreign capital already invested in the country.
3. With reduced capital accumulation, the investment will suffer a serious set – back which may have an adverse effect on the volume of production in the country. This may discourage entrepreneurs and business men from taking business risk.
4. Inflation also leads to hoarding of essential goods both by the traders as well as the consumers and thus leading to still higher inflation rate.
5. Inflation encourages investment in speculative activities rather than productive purposes.
