-In the figure above, the price of bonds would fall from P₁ to P₂ if ________. A) inflation is expected to increase in the future B) interest rates are expected to fall in the future C) the expected return on bonds relative to other assets is expected to increase in the future D) the riskiness of bonds falls relative to other assets

Question

Quizplus · Accepted Answer

When inflation is expected to increase in the future, the real value of the fixed payments that bonds provide decreases, making bonds less attractive to investors. As a result, the demand for bonds falls, leading to a decrease in bond prices.

-In the Figure Above, the Price of Bonds Would Fall