Which statement best describes the effect of inflation on the real value of a fixed pension?

• A. Inflation erodes the real value, reducing purchasing power over time if not indexed
• B. Real value remains constant regardless
• C. Inflation increases real value automatically
• D. Inflation only affects savers, not pensioners

Answer: (A)

The main idea here is how inflation affects the purchasing power of a fixed pension. If you receive a pension that stays the same in nominal terms, rising prices mean you can buy less with it over time—the real value is eroded unless the pension is indexed to inflation. So, a fixed pension loses real value and purchasing power as inflation climbs. The other statements don’t fit: real value won’t stay constant when prices change, inflation doesn’t increase real value automatically, and pensioners are affected by inflation just as savers are; their fixed income can lose purchasing power unless it’s indexed.