An increase in expected inflation results in
A) lower nominal interest rates and higher bond prices.
B) lower real interest rates and higher bond prices.
C) higher real interest rates and lower bond prices.
D) higher nominal interest rates and lower bond prices.

Question

Quizplus · Accepted Answer

An increase in expected inflation leads to a decrease in the purchasing power of future cash flows, which results in the lenders demanding higher nominal interest rates to compensate for the loss of purchasing power. This leads to lower bond prices, as the fixed coupon payments become less attractive relative to the higher market interest rates.

An Increase in Expected Inflation Results in