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

Question

Quizplus · Accepted Answer

If people expect nominal interest rates to be lower in the future, the expected return on bonds increases because the price of existing bonds (which have higher interest rates compared to the expected future bonds) will rise. As a result, people will prefer holding bonds over holding money, leading to a decrease in the demand for money.

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