Suppose a representative household holds a bond that is expected to pay a real return of $100 one year from now.However, over the next year, the inflation rate rises 15 percent more than was originally anticipated.As a consequence:
A)the real value of household wealth will increase.
B)consumption spending will increase, and aggregate demand will rise.
C)the purchasing power of money will rise.
D)savings will fall and aggregate expenditures will rise.
E)the aggregate expenditure in the economy will decrease.

Question

Quizplus · Accepted Answer

The unexpected rise in inflation erodes the real return on the bond, reducing the household's real wealth and purchasing power, leading to a decrease in aggregate expenditure.

Suppose a Representative Household Holds a Bond That Is Expected