A rise in expected inflation will result in all of the following EXCEPT
A) lower nominal interest rates.
B) lower real interest rates.
C) reduced demand for bonds.
D) increased supply of bonds.

Question

Quizplus · Accepted Answer

An increase in expected inflation usually leads to higher nominal interest rates. This is because lenders demand compensation for the loss of purchasing power of their money over time. As for the other options:
- B) Lowering real interest rates is often a consequence of higher inflation, as nominal rates may not adjust fast enough to keep pace with the rising prices.
- C) Reduced demand for bonds is also a common response to higher inflation, as the fixed income payments from bonds become less attractive relative to other investments that may offer higher returns or inflation protection.
- D) Similarly, an increased supply of bonds may be driven by issuers seeking to finance their operations before inflation erodes the value of their debt, or by investors seeking to sell their existing bond holdings to reduce exposure to inflation risk.

A Rise in Expected Inflation Will Result in All of the Following