Financial Knowledge Assessment: Q15A

15. If the current inflation rate is 4% per year...

  • A.  The value of my money in one year will be 4% less than it is today.
  • B.  My income needs to increase in one year by at least 4% to maintain my current lifestyle.
  • C.  Investments that I have made will automatically adjust to the inflation rate of 4%.
  • D.  All of the above.
  • E.  Both A and B.

Explanation:  The correct answer is “E. Both A and B.”   Both “A” and “B” reflect the outcome of the particular rate of inflation, which is 4% in this case, as well as how much more money you need in order to maintain your current lifestyle or standard of living.  Unfortunately, option “C” is not correct because your investments will not automatically increase at a rate of 4% per year.  In fact, you would have to earn at least 4% on an investment in a year to maintain its current value.

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