An increase in the expected rate of inflation will ________ the expected return on bonds relative to that on ________ assets,and shift the ________ curve to the left.
A) reduce; financial; demand
B) reduce; real; demand
C) raise; financial; supply
D) raise; real; supply

Question

Quizplus · Accepted Answer

An increase in the expected rate of inflation will reduce the expected return on bonds relative to that on real assets (like stocks or real estate), as the nominal return on bonds will be eroded by inflation. This will result in a shift of the demand curve for bonds to the left, as investors will demand lower quantities of bonds at any given interest rate, in order to compensate for the expected loss in purchasing power.

An Increase in the Expected Rate of Inflation Will ________