Listen During periods of inflation, retirees living on a fixed retirement pension and individuals who have savings accounts that earn a fixed rate of interest:
a) are hurt by inflation because taxes fall.
b) are hurt by inflation because their purchasing power drops.
c) benefit from inflation because interest rates rise.
d) benefit from inflation because they are paid in cheaper dollars.
The correct answer and explanation is:
The correct answer is b) are hurt by inflation because their purchasing power drops.
Inflation represents the general rise in the prices of goods and services over time, which erodes the purchasing power of money. Retirees living on a fixed pension and individuals with savings accounts that earn a fixed rate of interest are particularly vulnerable to inflation. This is because the amount of money they receive remains constant, but the prices of goods and services continue to rise.
For retirees, their pension is usually fixed, meaning it does not increase with inflation. As a result, they are able to buy fewer goods and services with the same amount of money. Over time, this reduced purchasing power can significantly impact their standard of living, especially if inflation rates are high. This is particularly true for essential items like food, healthcare, and housing, which can see sharp price increases during inflationary periods.
Similarly, individuals with savings accounts earning a fixed interest rate may find that the real value of their savings declines over time. For example, if a savings account offers a 3% annual interest rate, but inflation is 5%, the real return on their savings is negative. In other words, even though they are earning interest, the value of their money is being eroded faster than it is growing.
Inflation essentially reduces the value of money over time, which impacts those on fixed incomes or who earn fixed returns on their savings. While inflation may lead to higher interest rates in the broader economy, this does not necessarily benefit individuals with fixed-rate savings or fixed pensions, as the interest rate increase may not keep pace with inflation’s impact on purchasing power.