When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises
correct option - D) decreases, increases, rises
Bond investors are promised a fixed amount of money in non-inflation adjusted currency. The more inflation the less valuable their future payments become.The less inflation the more valuable their payments become.
When inflation expectation rises. therefore investors demands a higher interest rate for their investment as the compensation for the lost value, other things being equal. Demand for bonds falls, bond prises fall and interest rate rises.
Get Answers For Free
Most questions answered within 1 hours.