Final answer:
Inflation leads to a decrease in purchasing power and can detract from the real returns of investments, penalizing suppliers of financial capital and affecting long-term economic planning.
Step-by-step explanation:
To complete the paragraph about inflation, we should discuss how it affects purchasing power and investments. As inflation increases, the purchasing power decreases. This means that each unit of currency buys fewer goods and services than before, effectively reducing the value of money held by individuals and businesses. High inflation erodes the returns from investments because the nominal return may not keep up with the rate of inflation. In such a scenario, if you have an investment that yields a 4% return, but inflation is at 5%, the real return on your investment would actually be negative.
Furthermore, when interest rates are fixed, rises in the rate of inflation tend to penalize suppliers of financial capital, who receive repayment in dollars that are worth less because of inflation, while demanders of financial capital end up better off, as they can repay their loans in dollars that have depreciated. Thus, high inflation detracts from investments, making it more challenging to earn a positive real rate of return.