What type of automatic inflation protection will provide the greatest benefit increases?

A. Simple inflation protection
B. Compound inflation protection
C. No inflation protection
D. Variable inflation protection



Answer :

Final answer:

Automatic inflation protection that offers the greatest benefit increases is provided by indexed bonds ensuring returns higher than inflation, as well as through automatic adjustments for inflation in contracts. Borrowers can benefit from inflation when borrowing at fixed rates lower than the inflation rate, lowering the real interest rate.


Explanation:

Indexed bonds that guarantee a rate of return higher than inflation provide the greatest benefit increases in terms of automatic inflation protection. These bonds ensure that the investor's returns remain above the inflation rate, thus safeguarding their purchasing power.

Automatic adjustments for inflation, such as those seen in long-term contracts, help both sellers and buyers by ensuring real prices are maintained despite inflation fluctuations.

Considering inflation's impact on investments, individuals can benefit from inflation when borrowing at fixed rates that are lower than the inflation rate, leading to a real interest rate that is effectively reduced or even zero.


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