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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.
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.
3.
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.
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.
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.
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