Recall the Application about the increase in political independence for the Bank of England and its effect on anticipated inflation to answer the following question(s). In 1997, the Bank of England became more independent from the government. Although the government still retained the authority to set overall policy goals, the Bank of England was free to pursue its policy goals without direct political control. Federal Reserve economist Mark Spiegel compared interest rates on two different types of long-term bonds, those that are automatically adjusted for inflation and those that are not, to see how the British bond market reacted to this policy change.
-According to this Application, the difference in interest rates on bonds that are automatically adjusted for inflation and bonds that are not adjusted primarily reflects
A) the prime rate of interest.
B) expectations of inflation.
C) the discount rate.
D) the velocity of money.

Question

Quizplus · Accepted Answer

The difference in interest rates on bonds that are automatically adjusted for inflation and bonds that are not reflects expectations of inflation. This is because investors will demand a higher return on their investment if they anticipate inflation eroding the value of the bond's future payments. When the Bank of England became more independent, it was better positioned to control inflation and reduce uncertainty about future inflation expectations, leading to a lower difference in interest rates between the two types of bonds.

Recall the Application About the Increase in Political Independence for the Bank