CFA Practice Question

CFA Practice Question

Inflation has all of the following effects EXCEPT,
A. it distracts producers into spending time on hedging and protective strategies to minimize the ill effects of inflation on their business.
B. it raises the real return on investments.
C. long-term contracts such as fixed rate mortgages, leases and throughput distort the true price level as they do not adjust immediately with inflation.
Explanation: Inflation results in higher nominal rates, but not in higher real rates. On the other hand, if inflation is unanticipated the real rate earned on an investment is reduced.

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