The demand curve for bonds would be shifted to the left by an
A)increase in wealth.
B)increase in expected returns on bonds.
C)increase in expected inflation.
D)increase in the liquidity of bonds relative to other assets.

Question

Quizplus · Accepted Answer

An increase in expected inflation reduces the purchasing power of the future bond payments, making them less attractive to investors, which shifts the demand curve for bonds to the left. None of the other choices listed have a direct effect on the demand for bonds. An increase in wealth may actually increase the demand for bonds as investors look for safe assets to store their newfound wealth, while an increase in expected returns on bonds would shift the demand curve to the right. An increase in the liquidity of bonds relative to other assets would also tend to shift the demand curve to the right, as investors find it easier to buy and sell bonds.

The Demand Curve for Bonds Would Be Shifted to the Left