A decrease in the expected rate of inflation will ________ the expected return on bonds relative to that on ________ assets.
A) reduce; financial
B) reduce; real
C) raise; financial
D) raise; real

Question

Quizplus · Accepted Answer

A decrease in the expected rate of inflation generally increases the expected return on bonds relative to real assets. This is because the nominal interest rates on bonds typically include an inflation premium. When expected inflation decreases, the inflation premium decreases, making the real return on bonds more attractive compared to real assets, whose nominal returns might not adjust as quickly.

A Decrease in the Expected Rate of Inflation Will ________