Recall Application 2, "Increased Political Independence for the Bank of England Lowered Inflation Expectations," to
answer the following questions:
-According to the application, if the bonds that were not adjusted for inflation and the inflation adjusted bonds had the same yield after the Bank of England's announced its increased political independence, then:
A) people expect that the Bank of England's independence has no effect on inflation.
B) people expect that the Bank of England's independence will allow inflation equal to the current bond yield.
C) people expect that the Bank of England's independence will result in zero inflation.
D) people expect that the Bank of England's independence will result in the elimination of inflation adjusted bonds.

Question

Quizplus · Accepted Answer

If both inflation-adjusted and non-inflation-adjusted bonds have the same yield, it implies that people expect zero inflation, as there would be no need for an inflation premium.