- In the figure above,the price of bonds would fall from P1 to P2 when
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

- In the figure above,the price of bonds would fall from P1 to P2 when
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.

Quizplus · Accepted Answer

The price of bonds would fall from P1 to P2 when inflation is expected to increase in the future because higher inflation erodes the real value of the fixed interest payments that bonds provide, making them less attractive to investors. This decreased demand for bonds leads to a fall in their price.

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