What is purchasing power risk, Financial Management

Assignment Help:

Q. What is Purchasing Power Risk?

Variations in the returns are caused also by the loss of purchasing power of currency. Inflation is the reason behind the loss of purchasing power. The level of inflation proceeds faster than the increase in capital value. Purchasing power risk is the probable loss in the purchasing power of the returns to be received. The rise in price penalizes the returns to the investor, and every potential rise in price is a risk to the investor. The inflation may be demand-pull or cost-push inflation.

In the demand-pull inflation, the demand for goods and services are in excess of their supply. At full employment level of factors of production, the economy would not be able to supply more goods in the short run and the demand for products pushes the price upward. The supply cannot be increased unless there is an expansion of labor force or machinery for production. The equilibrium between demand and supply is attained at a higher price level.

The cost-push inflation, as the name itself indicates that the inflation or the rise in price is caused by the increase in the cost. The increase in the cost of raw material, labor and equipment makes the cost of production high and ends in high price level. The producer tries to pass the higher cost of production to the consumer. The laborers or the working force try to make the corporate to share the increase in the cost of living by demanding higher wages. Thus, the cost push inflation has a spiraling effect on price level.


Related Discussions:- What is purchasing power risk

Decision making, Write a report to the Board of Directors of Solvent Ltd to...

Write a report to the Board of Directors of Solvent Ltd to analyse the performance of companies X and Y and to give recommendation as which of those two investment opportunities is

Functions of treasurer, Functions of Treasurer:- (1) Cash Management: -...

Functions of Treasurer:- (1) Cash Management: - It comprises the managing of cash receipts and cash payments of the business. (2) Banking Relations: - It comprises operating

Create a data entry and balance sheet, The ledger of AISExperts Inc. showed...

The ledger of AISExperts Inc. showed the following balances after adjustment , but before closing, on December 31, 2012, the end of the current year: Accounts payab

Issuing procedure of treasury bills, Issuing Procedure of treasury bills ...

Issuing Procedure of treasury bills As discussed above, the RBI on behalf of central government, announces the auctioning of T-bills by tender notification through the press. T

Help with 4 questions, I need assistance with 4 questions. How do I know s...

I need assistance with 4 questions. How do I know someone can help me and have some idea of what it would cost before submitting the information? Also, how fast is the turnaround

Healthcare Finance, I am trying to make a payment and I can''t seem to get ...

I am trying to make a payment and I can''t seem to get it to go throught on you all site..

Settlement of the index options contract, Settlement of the Index Options C...

Settlement of the Index Options Contract In the index options contract, the premium to be paid or to be received is calculated for each CM after netting the positions at the en

Define which proposed capital budgeting projects to accept, For a specified...

For a specified IOS and MCC, how do financial managers decide that which proposed capital budgeting projects to accept, and which to reject? For a specified IOS and MCC, all inde

Total revenue change, Write an essay explaining that the quantities of good...

Write an essay explaining that the quantities of goods and services that we can produce are limited by both our available resources and by technology. Assume we want to increase

What are the requirements of ifrs 8, What are the requirements of IFRS 8 ...

What are the requirements of IFRS 8 IFRS 8 requires an organisation to adopt management approach to reporting on financial performance of its operating segments. General idea

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd