As a result of higher expected inflation
A) the demand and supply curves for bonds both shift to the right and the equilibrium interest rate usually rises.
B) the demand and supply curves for bonds both shift to the left and the equilibrium interest rate usually falls.
C) the demand curve for bonds shifts to the right, the supply curve for bonds shifts to the left, and the equilibrium interest rate usually rises.
D) the demand curve for bonds shifts to the left, the supply curve for bonds shifts to the right, and the equilibrium interest rate usually rises.

Question

Quizplus · Accepted Answer

Higher expected inflation causes an increase in the demand for bonds as people look for a way to protect the purchasing power of their money. This results in a rightward shift of the demand curve for bonds. However, at the same time, the supply of bonds decreases as sellers hold onto them to avoid the lower real return caused by inflation. This results in a leftward shift of the supply curve for bonds. The equilibrium interest rate thus increases.

As a Result of Higher Expected Inflation