13. What is Inflation
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In this lesson, students learned about the impacts of inflation. By understanding what causes inflation, we can then understand how it destroys the yield of a loan and maintains the value of corporate ownership.
We learned that inflation is generally caused when the government increases the supply of money in the financial system. When this occurs, members of the system have more money to spend and the price of goods and services go up.
This increase in price can drastically destroy a long term investment if the investor doesn’t account for the compounding inflation rate.
The most important thing you can learn from this lesson are the two following points:
1. Bonds are completely affected by inflation.
2. Stocks are not necessarily affected by inflation.