Question

When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________,...

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

Why D?

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Answer #1

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.

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