A decrease in the expected rate of inflation causes the demand for bonds to ________ and the supply of bonds to ________.
A) fall; fall
B) fall; rise
C) rise; fall
D) rise; rise

Question

Quizplus · Accepted Answer

When the expected rate of inflation decreases, the demand for bonds increases since they become more attractive investment options due to the expected lower rate of inflation eroding their value. This causes bond prices to rise and, therefore, the supply of bonds to fall as investors hold onto their bonds, expecting to sell them at higher prices in the future.

A Decrease in the Expected Rate of Inflation Causes the Demand