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

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1.
One measure of inflation in the United States is the Consumer Price Index.
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True. The Consumer Price Index measures inflation.
2.
Evidence has shown that inflation and stocks have which relationship?
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Real returns on stocks tend to decrease when inflation increases. Remember that real returns are adjusted for inflation.
3.
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.
4.
Which of the following is not an effective hedge against inflation?
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Fixed-rate bonds. These are not an effective hedge against inflation. When inflation rises, the nominal rate of return on fixed-rate bonds stays the same. This means that the real rate of return on fixed-rate bonds decreases.
5.
High inflation results in lower nominal returns for fixed-income investors.
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False. Nominal returns are not affected by inflation. However, high inflation will result in lower real returns for fixed-income investors.
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