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

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1.
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.
2.
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.
3.
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.
4.
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.
5.
One measure of inflation in the United States is the Consumer Price Index.
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True. The Consumer Price Index measures 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