Because inflation reduces the purchasing power of the dollar, investors seek investments that will provide higher returns

Question:

Because inflation reduces the purchasing power of the dollar, investors seek investments that will provide higher returns when inflation is higher. It is frequently stated that common provide just such a hedge against inflation. The annual percentage rates of return on and annual inflation rates for a recent 10-year period are listed here.

Year 1 2 4 5 10 Returns 25 8 4.4 4.2 4.1 4.0 5.2 5 11 21 -15 12 -1 33 0 Inflation 5.0 3.8 2.1 1.7 0.2 3.

Draw a scatter diagram and describe what it tells you about the relationship between returns and inflation.

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