An increase in expected inflation for any given nominal interest rate will cause the:

Question

Quizplus · Accepted Answer

An increase in expected inflation will reduce the purchasing power of future bond payments. This will cause investors to demand a higher yield to compensate for the expected loss in purchasing power. As a result, the price of bonds will decrease. Therefore, the correct answer is C, which states that the price of bonds will decrease.

An Increase in Expected Inflation for Any Given Nominal Interest