-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

-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

Quizplus · Accepted Answer

If inflation is expected to increase in the future, the real return on bonds decreases, leading to a decrease in demand for bonds and thus a fall in their price from P₁ to P₂.

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