Higher expected inflation ________ the supply of bonds and ________ the demand for bonds.
A) increases; increases
B) increases; reduces
C) reduces; increases
D) reduces; reduces

Question

Quizplus · Accepted Answer

Higher expected inflation reduces the purchasing power of future bond payments, hence reducing the demand for bonds. As a result, investors demand a higher yield or interest rate to compensate for the increased inflation risk, leading to an increase in the supply of bonds. Therefore, option B - increases the supply of bonds and reduces the demand for bonds - is the best choice.

Higher Expected Inflation ________ the Supply of Bonds and ________

Higher Expected Inflation the Supply of Bonds and