Other things being equal,a rise in the price level will imply ________ in wealth for the bondholder and ________ in the wealth of the issuer of the bond.
A)a decline; an increase
B)a decline; a decline
C)a decline; no change
D)an increase; a decline
E)an increase; an increase

Question

Quizplus · Accepted Answer

A rise in the price level implies a decline in the purchasing power of money. As a result, the nominal value of the bond remains the same, but the real value declines. This decrease in the real value of the bond implies a decline in wealth for the bondholder. On the other hand, for the issuer of the bond, inflation reduces the real value of the amount borrowed, which means the issuer benefits from a decrease in the real value of the bond.

Other Things Being Equal,a Rise in the Price Level Will