Final answer:
The correct answer is b) reduced, real, less than, indicating that positive inflation reduces purchasing power and the real rate of return on investments is less than the nominal rate.
Step-by-step explanation:
If the inflation rate is positive, purchasing power is reduced. This situation is reflected in the real rate of return on an investment, which will be less than the nominal rate of return. Therefore, the correct answer to the student's question is b) reduced, real, less than.
When inflation occurs, the value of a currency decreases in real terms, impacting the purchasing power negatively. For example, if you have money in a savings account that provides a nominal interest rate that is lower than the inflation rate, you are actually losing purchasing power.
Lastly, it's important to note that when interest rates are fixed, rises in the rate of inflation tend to penalize lenders (who receive repayment in dollars that are worth less) and benefit borrowers (who repay their loans in dollars that are worth less than anticipated).