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

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1.
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.
2.
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.
3.
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.
4.
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.
5.
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.
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