The expected change in the supply and demand for bonds due to an increase in expected inflation will definitely result in
A) an increase in the equilibrium price of bonds.
B) an increase in the equilibrium quantity of bonds.
C) a decrease in the equilibrium price of bonds.
D) a decrease in the equilibrium quantity of bonds.

Question

Quizplus · Accepted Answer

An increase in expected inflation results in a decrease in the demand for bonds, since the return on bonds may not keep pace with increasing inflation. As demand decreases, the equilibrium price of bonds will also decrease, while the equilibrium quantity of bonds that buyers are willing and able to purchase will also decrease. Therefore, the correct choice is C, a decrease in the equilibrium price of bonds.

The Expected Change in the Supply and Demand for Bonds