When there is inflation in the economy, which of the following would be a smart decision?

• A. Invest in assets that tend to appreciate in value, such as real estate or stocks.
• B. Increase fixed-income investments like long-term bonds.
• C. Delay purchases of goods and services expecting prices to fall.
• D. Hold large amounts of cash for long periods.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the impact of inflation on purchasing power. Inflation causes the general price level to rise, which means money loses value over time.
2. Step 2: Analyze how different types of investments respond to inflation. For example, fixed-income investments like long-term bonds pay a fixed amount, so their real value decreases when inflation rises.
3. Step 3: Consider assets that tend to appreciate or keep pace with inflation, such as real estate or stocks, which often increase in value as prices rise.
4. Step 4: Evaluate the strategy of delaying purchases. Since inflation means prices are generally rising, delaying purchases expecting prices to fall is usually not beneficial.
5. Step 5: Assess the value of holding cash during inflation. Holding large amounts of cash leads to a loss of purchasing power, so it is generally not a smart decision during inflation.