Question

Rob is a business analyst who argues that investing makes more profit when the inflation rate is high. He points to the high returns in the 1980s when inflation was around 12% and returns were as high as 20% or higher. Evaluate Rob's claim.

Select the best answer from the choices provided.
A.
Rob is correct because stocks and other goods increase in value due to inflation.
B.
Rob is confusing the nominal rate of return with the real rate of return.
C.
Rob is forgetting that inflation causes most businesses to do poorly.
D.
Rob is correct because inflation enables dollar profits to buy more goods.

Answer 1

B. Rob is confusing the nominal rate of return with the real rate of return.

Nominal rate of return is the "face value" of returns, but the real rate of return factors in the negative effect that inflation has on buying power. Inflation takes away from any earnings because it reduces the value of money.