Question 13
An investor earns a 7% nominal return on a fixed-income investment over a one-year period. During the same year, the economy experienced a 4% general inflation rate. If all other market factors remain constant, what is the primary impact of inflation on the investor's returns?
It increases the real purchasing power of the investment's final payout.
It has no impact on the purchasing power, as nominal returns dictate actual wealth.
It erodes the real purchasing power of the investment returns, yielding a lower real rate of return.
It guarantees a higher inflation-adjusted profit across all asset classes.