If people expect nominal interest rates to be higher in the future, the expected return on bonds ________, and the demand for money ________.
A) rises; increases
B) rises; decreases
C) falls; increases
D) falls; decreases

Question

Quizplus · Accepted Answer

When people expect nominal interest rates to rise, the expected return on holding bonds falls because the price of existing bonds will decrease as new bonds will offer higher interest rates. Consequently, individuals prefer holding money to buying bonds, leading to an increase in the demand for money.

If People Expect Nominal Interest Rates to Be Higher in the Future