The Harrod-Keynes effect argues that :
A) There is a direct positive relationship between the nominal rate of interest on bonds and the expected rate of inflation
B) Since the coupon rate on bonds is fixed, an investor's real rate of return on bonds is lowered if inflation increases
C) Inflation lowers the return on common stocks and real assets
D) The real rate of return on bonds is determined by the total demand for and the supply of money
E) None of the above

Question

Quizplus · Accepted Answer

The Harrod-Keynes effect suggests that inflation erodes the real value of the fixed interest payments from bonds, thus lowering the real rate of return for investors. This is because the coupon rate on bonds does not change, so as inflation increases, the purchasing power of the interest payments decreases.

The Harrod-Keynes Effect Argues That