Canadian Securities Course (CSC) Level 1 Practice Exam

What are some of the costs of inflation?

1. Increased profits for businesses and improved international trade relations

2. Higher wages for workers and stable interest rates

3. Erosion of standard of living, reduced real value of investments, and rising interest rates

4. Decrease in unemployment rates and enhanced economic growth

The correct answer is: Erosion of standard of living, reduced real value of investments, and rising interest rates

The correct answer highlights significant costs of inflation, specifically the erosion of the standard of living, reduced real value of investments, and rising interest rates. When inflation occurs, the purchasing power of money decreases, leading to an erosion of the standard of living. People find that their income does not stretch as far as it used to, making it harder to afford the same goods and services. This can cause financial strain, especially for those on fixed incomes. Additionally, inflation can reduce the real value of investments. For instance, if an investor earns a nominal return of 5% on an investment but inflation is running at 3%, the real return is only 2%. This diminishes the overall wealth of individuals who are trying to grow their assets over time. Rising interest rates are also often a consequence of inflation. As inflation increases, central banks may raise interest rates to help control it. Higher interest rates can lead to reduced borrowing and spending, which can stifle economic growth. In contrast, the other choices suggest outcomes that are either benefits or unrelated to the costs of inflation, which does not accurately reflect the negative impacts that inflation has on economies and individuals.