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Basics (Saving and Investing) Intermediate: Effects of Inflation on Investments

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1.
Inflation occurs when the general price level falls from one period to the next.
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False. Inflation occurs when the general price level rises from one period to the next.
2.
An annuity or bond whose interest rate is linked to the Consumer Price Index is considered a perfect hedge against inflation.
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True. Interest rates that are linked to the Consumer Price Index will increase at a proportional rate to inflation, making index-linked investments a perfect hedge.
3.
What does inflation measure?
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The rate of increase in the general price level of goods and services. With regard to prices, inflation refers to their growth.
4.
Historically, stocks have provided a rate of return superior to the rate of inflation in the United States.
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True. Stock returns have historically outpaced inflation in the United States; this is one reason for their popularity.
5.
To measure your gain on an investment in terms of purchasing power, you should look at its _______.
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Real interest rate. The real rate measures the return on your investments after subtracting out inflation.
Introduction to Effects of Inflation on Investments What Is Inflation? The Effect of Inflation on Fixed-Income Investments The Effect of Inflation on Stocks Hedging against Inflation Summary of Effects of Inflation on Investments Find out what you learned