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

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1.
An annuity or bond whose interest rate is linked to the Consumer Price Index is considered a perfect hedge against inflation.
Choose wisely. There is only one correct answer.
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.
2.
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.
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.
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.
5.
Historically, stocks have provided a rate of return superior to the rate of inflation in the United States.
Choose wisely. There is only one correct answer.
True. Stock returns have historically outpaced inflation in the United States; this is one reason for their popularity.
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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