When the fed increases the money supply and creates inflation it erodes the real value of the unit of account and makes it more difficult for investor to sort succefull from unsuccesfull firms?
Answers
Confusion and Inconvenience
The job of the Fed is to ensure reliability of a commonly used unit of measurement.
When the Fed increases the money supply and creates inflation, it erodes the real value of the unit of account
-accountants incorrectly measure firms' earnings when prices are rising over time.
Because inflation causes dollars at different times to have different real values, computing a firms' profit- the difference between its revenue costs- is more complicated in an economy with inflation.
****Therefore to some extent, inflation makes investors less able to sort successful from unsuccessful firms, which in turn impedes financial markets in their role of allocating the economy's saving to alternative types of investment
Answer is in the attachment
