-In the figure above,the price of bonds would fall from P₁ to P₂ when
A)inflation is expected to increase in the future.
B)interest rates are expected to fall in the future.
C)the expected return on bonds relative to other assets is expected to increase in the future.
D)the riskiness of bonds falls relative to other assets.

Question

-In the figure above,the price of bonds would fall from P₁ to P₂ when
A)inflation is expected to increase in the future. 
B)interest rates are expected to fall in the future. 
C)the expected return on bonds relative to other assets is expected to increase in the future. 
D)the riskiness of bonds falls relative to other assets.

Quizplus · Accepted Answer

When inflation is expected to increase in the future, the real return on bonds decreases, leading to a decrease in demand for bonds and thus a fall in their price from P₁ to P₂.

-In the Figure Above,the Price of Bonds Would Fall from P₁