ECONOMICS
GDP
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Their income will not increase, so their purchasing power falls.
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They have to ask for an increase in wages to match inflation.
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Their investments will not pay as much interest.
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They have to wait for the government to react to the crisis.
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Detailed explanation-1: -Inflation can have a negative effect on fixed-income assets when it leads to higher interest rates. It usually does. Central banks like the U.S. Federal Reserve typically set inflation targets and, when inflation exceeds the desired threshold, they raise interest rates to bring it under control.
Detailed explanation-2: -As inflation rises, individuals are on the lookout for investments which will provide them with returns higher than that of the inflation rate. However, for any fixed-income investment, the interest rates do not change. This becomes counter-intuitive as they become less attractive to investors.
Detailed explanation-3: -For fixed income investors, the primary concern regarding rising inflation is the potential for interest rates to rise. Rising interest rates put pressure on fixed income investments by causing prices for existing bonds to fall.
Detailed explanation-4: -In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.