An increase in the expected rate of inflation causes the demand for bonds to ________ and the supply for bonds to ________.
A) fall; fall
B) fall; rise
C) rise; fall
D) rise; rise

Question

Quizplus · Accepted Answer

An increase in the expected rate of inflation reduces the real return that investors can earn from holding a bond with a fixed nominal interest rate. This makes investing in bonds less attractive, leading to a decline in demand. At the same time, the bond issuers may see the opportunity to issue new bonds at higher nominal interest rates to offset the anticipated higher inflation, so they increase the supply of bonds. Therefore, the demand for bonds falls, while the supply rises.

An Increase in the Expected Rate of Inflation Causes the Demand