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

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1.
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.
2.
Real returns on stocks tend to decrease when inflation increases.
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True. Evidence has shown that inflation causes a decrease in the real return on stock investments.
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.
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.
5.
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.
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